The Bank of New York Mellon agreed Thursday to pay $714 million to settle charges it victimized investors through the bank's "standing instruction" foreign exchange trading program.
The program made automatic currency exchanges for customers, including two New York state agencies, on the promise that the bank would get them the best available rates. Instead, state and federal prosecutors said, BNY Mellon kept the lower rates for its own trades, gave its customers the worst rates, or close, and pocketed the difference.
The bank "engaged in a deliberate, prolonged effort to conceal its pricing methods," according to the Department of Labor.
The payment resolves the federal and state governments' cases, certain private cases that arose as a result of the same fraud, and investigations by the Securities and Exchange Commission and the DOL.
DOL announced that $84 million of the settlement will go to repaying employee benefit plan customers who were victimized through the bank's foreign exchange trading program.
Also, of the $714 million in settlement funds announced Thursday, New York state and the U.S. Department of Justice will each be allocated $167.5 million, and New York Attorney General Schneiderman will direct nearly all of the state's amount to compensate BNYM's defrauded customers. Two New York agencies – the New York State Deferred Compensation Plan and the State University of New York – were among those customers and will be fully compensated for their losses, Schneiderman said in a press release.
In addition, Schneiderman and U.S. Attorney Preet Bharara said in the statement, BNYM has admitted the factual details of its fraud, will end the employment of certain executives involved in the fraud, will reform its practices to improve and increase the information it provides to its customers, and will waive the deductibility of state and local taxes with respect to New York's portion of the settlement.
"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," said Schneiderman, in the statement.
Bharara added that the Bank of New York Mellon's "custody clients, many of whom are public pension funds and nonprofit organizations, trusted the Bank to be honest about the financial services it was providing and to deal with them fairly. BNYM and its executives, motivated by outsized profits and bonuses, breached this trust and repeatedly misled clients to believe that the pricing they were getting on foreign exchange was far better than it actually was."
After three years of litigation, the bank, he continued, "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."
Secretary of Labor Thomas Perez said in a statement that the case "is a reminder that financial institutions charged with safeguarding retirement plan assets, sometimes put the institution's interests ahead of those of the investors they represent. Today's settlement offers more proof that when they do so, we at the department along with our colleagues at federal and state agencies will hold them accountable." As alleged in the case, Bharara and Schneiderman's joint release states that BNYM "systematically misrepresented how it handled its customers' FX transactions," telling customers that its Standing Instruction FX program "was an automated service that allowed a client to rely upon BNYM to obtain an FX rate and execute FX trades on the customer's behalf without any supervision or direct involvement by the customer, and that BNYM would obtain the "best rates" available for its customers."
