Bank of New York Mellon Corp., the world’s largest custody bank, failed to win dismissal of a lawsuit brought by the state of Virginia that accuses it of defrauding pension funds in foreign-currency trades.
A judge in Fairfax, Virginia, yesterday rejected the bank’s argument that the case couldn’t be brought under the Virginia Fraud Against Taxpayers Act because alleged false or fraudulent claims were never submitted to the state for payment.
“You have a cause of action,” Fairfax County Circuit Judge Terrence Ney told lawyers for the state during a hearing yesterday. “There’s no question about that.”
The next hearing in the case is set for Dec. 21.
“We are pleased that the court dismissed two of the three remaining claims brought by the commonwealth and are gratified that the judge scheduled a prompt hearing on the one remaining claim,” R. Jeep Bryant, a bank spokesman, said by e-mail.
State Attorney General Kenneth Cuccinelli sued in August, claiming the bank violated state law by charging “undisclosed markups” on currency-exchange trades to six retirement funds. Virginia is seeking about $931.6 million in damages.
‘Conduct to Defraud’
“While the bank states that there were three claims, there was actually only one claim, and that was that the Bank of New York Mellon engaged in a pattern of intentional conduct to defraud the commonwealth, its retirees and its taxpayers,” Brian Gottstein, a spokesman for Cuccinelli, said in an e-mail.
Gottstein said there were three “alternate theories” of how the bank violated the law.
“The court unequivocally held that the facts alleged were sufficient to allow the suit -- which is for nearly one billion dollars in damages and civil penalties -- to proceed toward trial,” he said.
All the cases center on the pricing of small foreign- exchange transactions handled automatically by the custody banks on behalf of the pension funds, a service known as standing instruction.
The banks say they acted as a principal, selling one currency for another in arms-length transactions at a set price that customers were free to accept or reject.
Acting as Agents
The states claim the banks were obliged to act as an agent, obtaining the best possible exchange rate in the interbank currency market. Banks misled clients on how they set prices, the states maintain.
The bank said in Virginia court papers that there was “a reasonable legal basis” under the contracts for the rates charged for transactions and that retirement fund managers “knew of and approved” procedures that the state claims were fraudulent.
“There’s no claim under the taxpayer fraud act, which requires going to the government and presenting a false claim,” argued Reid Figel, a partner at Kellogg, Huber, Hansen, Todd, Evans & Figel PLLC in Washington who represents BNY Mellon.
Joel Bernstein, a lawyer for Virginia, told the judge that false claims were made every time the bank submitted reports to Virginia regarding the holdings and transactions involving the pension funds.
He said the reports were meant to “convince us to keep our mouths shut while keeping the whole thing hidden from us.”
Bernstein, a partner at Labaton Sucharow LLP in New York, also referred to internal BNY Mellon e-mails cited in the lawsuit that Virginia alleges show company executives knew they were overcharging the pension funds and tried to hide it.
One of those e-mails was from Jorge Rodriguez, BNY Mellon’s executive vice president of global sales, to “several high- ranking” BNY Mellon executives in February 2008. Rodriguez, in the e-mail, said that the bank’s pricing scheme would “disappear” if clients had “full transparency,” according to Virginia’s complaint.
Ney, who ruled from the bench yesterday, said that assuming Virginia’s allegations are true, the bank submitted false records to the state because it was “permitting fund managers to pocket funds, which they would not be allowed to do.”
The case is Commonwealth of Virginia v. Bank of New York Mellon Corp. (BK), 09-15377, Circuit Court for the County of Fairfax, Virginia (Fairfax).
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