June 19, 2012 / 1:36 AM / 7 years ago

BNY Mellon settles with Prudential Fin over forex trades

June 18 (Reuters) - Bank of New York Mellon Corp will compensate Prudential Financial Inc after the insurer complained about the pricing of its foreign exchange transactions, according to a recent court filing by the U.S. Justice Department.

Over the past year, BNY Mellon has faced claims - from customers, the Justice Department, and state attorneys general - that the bank improperly charged customers for currency trading. Its settlement with Prudential indicates that the bank may be willing to settle with at least some customers.

The deal came to light in an amended lawsuit that the Justice Department filed earlier this month against BNY Mellon.

BNY Mellon agreed to repay more than half the revenue it generated from the Prudential currency trades in question, according to the amended Justice Department complaint.

Elsewhere in the complaint, the Justice Department said BNY Mellon generated more than $28 million from the trades with Prudential. A deal came in April after the insurer complained, and a bank executive said it heard “loud and clear.”

The Justice Department in October sued BNY Mellon in federal court in New York, alleging the bank defrauded federally insured banks in handling foreign exchange. The Justice Department and state attorneys general have alleged that BNY Mellon clients were often given the worst rates of the trading day, or almost the worst rates, when they traded currency with the bank.

A Prudential spokesman declined to comment. BNY Mellon said in an emailed statement on Monday that it has done nothing wrong, and will continue to defend itself vigorously. It declined to comment about Prudential specifically, but said it “will be pragmatic in resolving these issues.”

EXAMPLE

A foreign exchange trade for Prudential’s trades was used as an example in the Justice Department’s amended lawsuit this month. The U.S. government described an Oct. 23, 2008, transaction that BNY Mellon handled for Prudential in which it priced a deal that was “very close to the worst rate of the day.”

“If the transaction had been performed according to best execution standards, per the bank’s representations, Prudential would have received a more favorable rate,” the lawsuit said.

Last month, BNY Mellon won a court victory when a state judge in Virginia dismissed a lawsuit that alleged the bank overcharged for currency transactions handled for pension funds in Virginia.

But in California, BNY Mellon won only a partial victory in a similar lawsuit, with some charges being thrown out and some not.

The Justice Department’s lawsuit alleges that BNY Mellon defrauded custodial clients between at least 2000 and 2011 when it exchanged currencies using standing instruction.

From 2007 to 2010, the bank generated more than $1.5 billion from its top 200 standing-instruction clients, the lawsuit alleges. An appendix to the lawsuit lists state, local and corporate clients who used the bank to handle currency trades using standing instruction, a program allowing the bank to consistently handle trades for the client.

The Justice Department’s latest lawsuit also singles out BNY Mellon executive David Nichols, alleging he “fraudulently misled customers about the foreign exchange service” the bank provided to clients.

BNY Mellon said in an emailed statement to Reuters that “the belated decision to single out one employee is deeply troubling.” A lawyer for Nichols declined to comment.

A Justice Department spokeswoman declined to comment.

STANDING INSTRUCTION CLIENT

In 2011, as BNY Mellon drew scrutiny for how it traded money, Prudential representatives met with BNY Mellon executives to discuss how BNY Mellon determined its currency-exchange costs. The Justice Department lawsuit alleged that BNY Mellon didn’t disclose it used at or near a least-favorable rate for clients.

BNY Mellon, the lawsuit alleged, “intentionally” sought to “mislead Prudential so that it would remain a standing instruction client. Indeed, Prudential would have looked elsewhere for foreign exchange services had (BNY Mellon) been truthful.”

The two financial firms continued to discuss the currency-exchange costs, resulting in an August 2011 disclosure where BNY Mellon “admitted” it had made more than $28 million in revenue between 2006 and 2011 for handling standing-instruction currency transactions for Prudential. A month later, “representatives of Prudential expressed dissatisfaction with the way Prudential’s standing instruction transactions had been priced.”

The BNY Mellon executive in charge of the Prudential account “responded that Prudential’s message had been heard loud and clear.”

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