(Bloomberg) — Bank of New York Mellon Corp. will pay $714 million to settle allegations by the U.S. and New York state that it defrauded clients in foreign-exchange transactions for as long as a decade.
The settlement will end lawsuits brought by Manhattan U.S. Attorney Preet Bharara and New York Attorney General Eric Schneiderman as well as private class actions and probes by the U.S. Securities and Exchange Commission and the U.S. Labor Department, according to a joint statement by Bharara and Schneiderman.
As part of the deal, the bank will end the employment of certain executives who were involved in the practices, they said.
Federal and state officials alleged in lawsuits filed in 2011 that the bank misled investors about foreign-exchange deals by promising it would provide the best rates available when executing trades. Instead, the bank obtained the best rates for itself and gave less favorable terms to customers, pocketing the difference, according to Thursdays statement.
Motivated by outsized profits and bonuses, the bank and its executives repeatedly misled clients to believe that the pricing they were getting on foreign exchange was far better than it actually was, Bharara said in the statement. The bank repeatedly deceived its customers and is paying a heavy penalty for it.
$2 Billion
Both cases centered on the pricing of small foreign- exchange transactions handled automatically by the bank on behalf of clients, a service known as standing instructions. In the federal case, Bharara said the bank defrauded clients of more than $1.5 billion. New Yorks Schneiderman claimed the bank made $2 billion through the allegedly fraudulent practices over 10 years.
Todays settlement shows that institutions and individuals responsible for defrauding investors will be held accountable and face serious consequences for their wrongdoing, Schneiderman said. The outcome also shows what can be achieved when law enforcement agencies collaborate on an important matter such as this one.
In a separate statement, the bank said its pleased to put these legacy FX matters behind us, which is in the best interest of our company and our constituents.
Litigation Costs
BNY Mellon last month restated fourth-quarter earnings after boosting litigation expenses by $598 million in anticipation of settling legal matters, including lawsuits related to foreign exchange.
The U.S. case was brought under the Financial Institutions Reform, Recovery and Enforcement Act, or Firrea, which was enacted in 1989 after the savings-and-loan crisis. Prosecutors have used the statute to bring civil cases against other banks including CitiMortgage Inc., Wells Fargo & Co. and Bank of America Corp. over mortgage-related conduct in the lead-up to the financial crisis.
New York began its case after a whistle-blower lawsuit was filed in 2009 under the states False Claims Act. The scheme defrauded thousands of clients nationwide, including public and private pension funds and federally insured financial institutions, according to Schneiderman.
Money Split
The Justice Department and New York will each receive $167.5 million. Schneiderman said hell use his share of the funds to compensate customers who were victims of the fraud, including the New York State Deferred Compensation Plan and the State University of New York.
The Labor Department will receive $14 million and the SEC will get $30 million, according to the bank. The company also agreed to pay $335 million to settle five customer class-action lawsuits, Bharara said.
The bank has also agreed to increase the amount of information it gives customers, officials said.
One of the employees BNY Mellon agreed to terminate was David Nichols, a managing director who oversaw its Global Markets website and approved the content, according to settlement papers filed in Manhattan federal court. A judge must approve the Justice Departments part of the deal.
According to the agreement, Nichols knew that BNY Mellon didnt disclose its forex pricing methodology to its custodial clients or their investment managers. He also knew that many clients didnt fully understand the banks pricing methodology for the transactions at issue, according to the papers.
A lawyer for Nichols, Stephen Fishbein, said his client, 60, remains a BNY Mellon employee. Fishbein declined to comment further. Nichols was named as a defendant in Bhararas case along with the bank.
The federal case is U.S. v. Bank of New York Mellon, 11- cv-06969, U.S. District Court, Southern District of New York (Manhattan). The state case is People v. Bank of New York Mellon, 114735-2009, New York State Supreme Court (Manhattan).
