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Robert Trigaux

Lawsuit: Did BNY Mellon favor itself in currency trading for Florida pension system?



bnymellonlogousethis.jpgWake up and good morning. Well,maybe it's not a so-good morning for Bank of New York Mellon. Florida and Virginia sued the bank over the way it handles both states' pension funds. The Bank of New York Mellon holds about $130 billion in funds for the Florida Retirement System, and $54 billion for Virginia's.

Both lawsuits accuse the bank of overcharging those pension funds on foreign currency transactions. The bank said in a statement that the lawsuits are unwarranted, and that the defendants will fight the claims in court. Here's the St. Petersburg Times coverage so far.

floridaretirementsystemlogo.jpgBut let's look closer. The Virginia lawsuit refers to an apparent 2008 email from a senior BNY Mellon banker, Jorge Rodriguez, warning his colleagues. If the bank was required to provide "full transparency" to its clients, he writes, the clients' "ability to carefully monitor each and every trade at the time of execution" would eat into profits by reducing the bank's "margins dramatically."

Hmmm. Sure don't want client transparency. That leads to things like accuracy and accountability and we sure don't want to go down that road, right?

The Florida lawsuit does not quantify how much the state says BNY Mellon overcharged but seeks to recover triple damages from BNY Mellon and other penalties. "Due to BNY Mellon's misconduct, the state will ultimately have to provide millions of additional dollars to the (Florida system)," the suit said.

BNY Mellon's actions cause the Florida plan "to pay far more than it should have for buys and receive much less than it should have for sells." Here's more detail from a Pension & Investments story.

This is interesting. The Wall Street Journal says it separately examined almost four years of currency-trading data for two U.S. pension funds in California and Massachusetts and found that that BNY Mellon often gave both funds exactly the same exchange rates. But the currency rates BNY Mellon gave the two funds often were at or near the less favorable ends of the daily trading range.

The issue gets murkier during heightened financial-market volatility -- and we've seen gobs of that in recent years. An internal 2008 BNY Mellon document reviewed by the Wall Street Journal said large currency-price swings help the bank's revenue because they allow traders to "capture greater trading gains" when executing currency trades for institutional clients. In other words, it's a lot easier to quote rates favorable to the bank because the market swings are so much greater.

The newspaper report also notes that a whistleblower group has filed civil suits against BNY Mellon and another big banking company -- State Street Corp. -- in Florida, California and Virginia, alleging the banks unfairly priced currency trades for their clients, pension funds that thousands of teachers, police, firemen and retirees rely upon. Those lawsuits are based in part on information provided by whistleblowers within the two banks. 

"In the Florida suit filed in Leon County court," the Journal story reports, "state Attorney General Pamela Jo Bondi also alleged the bank gave special treatment to a client who were believed to be closely watching how BNY Mellon priced trades." That "client" is not identified.

Read the full Wall Street Journal story here.

-- Robert Trigaux, Business Columnist, St. Petersburg Times


[Last modified: Friday, August 12, 2011 8:05am]


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