A years-long investigation into whether Bank of New York Mellon Corp and other banks overcharged clients on foreign-exchange transactions has risen to a new level with a civil fraud action by federal prosecutors who police Wall Street.
The move late Tuesday by the U.S. Department of Justice -- and a separate lawsuit brought the same day by New York's attorney general -- rattled investors in BNY Mellon stock. Analysts said on Wednesday that the legal action adds to risks for the company, which along with State Street Corp is also facing foreign-exchange lawsuits in other states.
The Justice Department's case was brought by Manhattan U.S. Attorney Preet Bharara's civil frauds unit. He established the unit in March 2010 to bring new resources to fighting financial fraud and to seek redress for crimes they had not previously been able to. The lawsuit is only the second the office has brought under a relatively new law passed after the 1980s savings-and-loan scandal.
It accuses the custodial bank of improperly misrepresenting currency exchange rates to clients so that it can protect a lucrative part of its business.
This is an application of the federal law in an area to the best of my knowledge that hasn't been tried before and we'll see how the courts react to it, said Mark Rifkin, a shareholder lawyer at Wolf Haldenstein Adler Freeman & Herz in New York who is not involved in foreign-exchange litigation.
The state lawsuit looks more straightforward -- you said you were going to do one thing and you did something else, he said of the New York state attorney general's complaint.
BNY Mellon shares fell 57 cents, or 3 percent, to $18.25, in afternoon trading on Wednesday.
The new lawsuits are a clear headline risk and a degree of fundamental risk, Evercore Partners stock analyst Andrew Marquardt wrote in a research note. He said the news will weigh on shares of BNY Mellon and, to a lesser extent, State Street. State Street stock was little changed, down 3 cents at $32.03.
BNY Mellon has signaled it would fight both lawsuits. Spokesman Kevin Heine said both sets of prosecutors had a fundamental misunderstanding of the foreign exchange market and the role of custodial banks. He said the lawsuits suffered the same flawed analysis of the banks' services to clients in foreign exchange transactions.
Legal battles have raged for several years over claims that custodial banks, mainly BNY Mellon and State Street, routinely overcharged pension funds and other institutional clients on currency transactions.
State Street was sued in October 2009 by the California attorney general over its foreign-exchange practices. In August this year, state officials in Florida and Virginia sued BNY Mellon, joining whistleblower lawsuits originally filed by the group FX Analytics.
The latest lawsuits targeted BNY Mellon's standing instruction service in which it provides clients with an as-needed basis for foreign exchange services. Prosecutors said that since 2000 the bank has been 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.
MORE THAN $2 BILLION SOUGHT
The DoJ case brings claims under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, which allows prosecutors to recover civil penalties from financial firms involving violations such as mail fraud and wire fraud. The statute allows the government to sue entities that defraud consumers.
The federal complaint said that if Bank of New York Mellon had provided time stamps on when the trades were executed, it would have been easier to determine whether their rates were fair and reasonable.
With an alleged fraud of this magnitude and scope, it is imperative for the United States to seek justice and reform on a broad scale while individual victims simultaneously pursue their own damages, Bharara said in a statement.
Bharara's office said the overcharges were a long-running practice and continued even after media reports of the State Street lawsuit in California. When the California lawsuit was publicized, BNYM's director of FX trading in New York emailed the Reuters report to all BNYM FX sales employees with the subject heading, 'Oh No', Tuesday's court papers contend.
BNY Mellon then was flooded with inquiries from clients and investment managers about whether BNYM was engaging in similar pricing conduct according to the federal lawsuit.
Tuesday's lawsuits were separate actions, and neither the Manhattan U.S. Attorney's office nor the New York State Attorney General referred to the other's case in their respective press releases.
When you see two agencies like that bringing charges within hours it could mean they coordinated the case but more times than not it is regulators trying to be the first to file charges, said Chicago securities lawyer Andrew Stoltmann.
A spokeswoman for Bharara declined comment. A spokesman for Schneiderman declined comment.
The cases are USA v The Bank of New York Mellon Corp, U.S. District Court for the Southern District of New York, No. 11-6969 and State of New York v. The Bank of New York Mellon Corp, New York State Supreme Court, New York County, No. 09/114735.
(Additional reporting by Andrew Longstreth and Karen Freifeld)