The Massachusetts secretary of state has officially filed a lawsuit against Bank of New York Mellon (“BNY Mellon”), alleging that the custody bank defrauded a state pension fund by charging unfavorable foreign exchange (“forex”) rates. Massachusetts joins New York, California, Virginia, and a number of other states and large investors suing BNY Mellon, State Street, and other similar institutions. In an official response, BNY said “these actions recycle baseless allegations, and as we’ve stated previously we are confident that we are right on the facts and the law. We provide all clients with a valuable service at competitive prices and any suggestion otherwise is simply wrong.”
Documents attached to the Massachusetts suit reveal new details surrounding the case. Specifically, internal BNY emails confirm that “standing instruction” or “non-negotiated” forex trading was highly lucrative for the bank. “As we all know, Standing Instruction [“forex”] is the most profitable form of business,” reads one February 2008 email from a bank executive. The executive goes on to complain that many customers were moving away from the standing-instruction model, which was cutting drastically into profit margins. “The problem is that in these cases, a fair return is only a fraction of what it could be if the business [were] awarded to BNY Mellon in a non-negotiated capacity,” the executive concluded.
According to the emails reproduced in the complaint, the bank’s sales margin on the standing-instruction model was .24% in the first nine months of 2009. This is significantly higher than the margin for trades made by customers who managed their own accounts–about .01%. In one email, the bank’s chief executive is said to have praised the forex business for having “really made ‘bundles of cash’ this year.”
Massachusetts Secretary of the Commonwealth William Gavin is adamant that “through its fraudulent scheme, [the bank] effectively stole tens of millions of dollars from Massachusetts state pensioners.” Yet despite these accusations, BNY Mellon says its standing-instruction business has grown since 2009.