Bank of New York Mellon Corp. (hereafter Bank of New York) has agreed to pay $714 million to resolve claims that it defrauded foreign exchange customers. This came in a settlement with New York Attorney General Eric Schneiderman and Manhattan U.S. Attorney Preet Bharara and it also ends the class action claims. Bank of New York also admitted to the facts alleged against it and agreed to fire two executives implicated in the scheme as part of the settlement, which also resolves claims from the U.S. Securities and Exchange Commission (SEC), the U.S. Department of Labor and some private litigants. The settlement includes a $335 million payout to customers involved in class action litigation against the bank. Attorney General Schneiderman said in a statement:
Investors count on financial institutions to tell them the truth about how their investments are being managed. But Bank of New York Mellon misled customers and traded at their expense.
The two attorneys general sued Bank of New York in October 2011, alleging that its traders charged its clients the worst rate of the trading day and pocketed the difference between the rate it charged and the actual market price at the time of the trades. The complaint alleged that several New York state agencies, including the New York State Deferred Compensation Plan, which manages the pensions for state employees, lost tens of millions of dollars because of Bank of New York Mellon’s actions.
The bank told customers that through its Standing Instructions program they would receive the “best rate of the day” or the “most competitive/attractive [foreign exchange] rates available to us.” But Bank of New York employees admitted to investigators that the bank neither sought the best rates for Standing Instructions customers nor provided the best execution.
The complaint alleged that although the Standing Instructions program accounted for only 20 percent of the bank’s foreign currency exchange transactions, it equaled 65 to 75 percent of its foreign exchange sales revenue. Bharara said in a statement:
The bank, after three years of litigation, has finally admitted what was always clear from the evidence — contrary to its various representations, including a claim of ‘best rates,’ the bank in fact gave clients prices at or near the worst interbank rates reported during the trading day. The bank repeatedly deceived its customers and is paying a heavy penalty for it.
Under the settlement, the offices of Schneiderman and Bharara will each receive $167.5 million. Attorney General Schneiderman said he will send the bulk of those funds to customers defrauded by Bank of New York, including the New York state pension fund and the State University of New York system. The Labor Department will receive $14 million and the SEC $30 million, in addition to the $335 million private settlement.
The settlement with Bank of New York is the latest in a string of settlements from major banks with law enforcement, regulators and private litigants over alleged violations in their foreign currency operations. UBS was the latest to settle private claims in a $135 million deal on March 13.
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