Bank of New York Mellon (BK.N) was sued on Tuesday by New York federal and state prosecutors who accused the bank of cheating clients in foreign exchange transactions.
In two separate lawsuits seeking in excess of $2 billion, the Manhattan U.S. Attorney and the New York Attorney General alleged the bank misled clients about the method for determining what currency exchange rates it used for certain foreign exchange transactions.
Both lawsuits targeted the "standing instruction" service offered by the bank in which it provides clients with an as-needed basis for foreign exchange services.
Prosecutors accused the bank of promising clients the best available rate but instead giving them the worst or nearly the worst and then making a profit for itself from the price differential.
The lawsuit filed in New York state court by New York Attorney General Eric Schneiderman is seeking to recover nearly $2 billion for BNY Mellon clients nationwide.
Manhattan U.S. Attorney Preet Bharara said his lawsuit, filed in federal court, is seeking "hundreds of millions of dollars" in civil penalties on behalf of the government.
A BNY Mellon spokesman said in a statement that the New York Attorney General's action was based on a "fundamental misunderstanding" of the foreign exchange market and the role of custodian banks.
"Simply put, this is the kind of prosecutorial overreach that ill serves New York, New Yorkers and the pension funds that the Office of New York Attorney General purports to represent," said the spokesman.
He also said that the U.S. Attorney's lawsuit is flawed.
"It fundamentally misunderstands and mischaracterizes the global foreign exchange market and the valuable services we provide to our clients as a principal in foreign exchange transactions," he said.
CAMPAIGN OF DECEPTION
According to the lawsuit filed by Schneiderman's office, BNY Mellon made misrepresentations about its foreign exchange operations to some of the most recognizable corporations, investment funds, educational institutions, pension funds, and governmental organizations in the world, including Microsoft Corporation (MSFT.O), Sears, Roebuck & Co, the World Bank, Duke University, and The Walt Disney Company (DIS.N).
From 2001 to the present, the bank engaged in a "multi-pronged campaign of deception" designed to induce private and government clients into believing that they would receive the best rate of the day for their foreign currency transactions, the lawsuit said.
New York is the latest state to bring claims against BNY Mellon, which has been battling allegations of FX overcharging for months. Virginia and Florida filed lawsuits against the company in August.
The New York Attorney General said the lawsuit, which was brought with the city of New York, adds new claims to an existing whistleblower action that was filed under seal by FX Analytics in 2009. FX Analytics also first brought the lawsuits in Virginia and Florida.
The New York Attorney General's lawsuit makes claims of violations of New York's Martin Act, a powerful statute from the 1920s that has been used to investigate and prosecute securities fraud on Wall Street.
On behalf of clients who were New York city and state entities, the suit also said that BNY Mellon violated the New York city and state False Claims Acts.
The famous fraud investigator Harry Markopolos, who raised concerns about Bernard Madoff, said he was behind the FX Analytics lawsuits and that the New York Attorney General's lawsuit was the biggest of its kind.
"This affects tens of millions of American retirees' pension accounts," he said.
The case brought by the U.S. Attorney brings claims under the Financial Institutional Reform, Recovery and Enforcement Act of 1989, which allows prosecutors to recover civil penalties for violating certain criminal statutes.
The state case is State of New York v. The Bank of New York Mellon Corporation, New York State Supreme Court, New York County, No. 09/114735. Information about the federal case was not immediately available. (Reporting by Andrew Longstreth in New York; additional reporting by Dan Levine in San Francisco; Editing by Bernard Orr & Gary Hill)