Massachusetts’ Galvin Says BNY Mellon Defrauded Pensions

Bank of New York Mellon Corp., the world’s largest custody bank, was accused by Massachusetts of defrauding public pension funds by overcharging on foreign-currency transactions.

BNY Mellon used “a hidden scheme that rigged the pricing of non-negotiated foreign-exchange transactions while maximizing profits for the bank,” Secretary of the Commonwealth William Galvin said in a statement today from Boston announcing the administrative action.

Massachusetts Treasurer Steven Grossman said in June that BNY Mellon, which is based in New York, overcharged the state’s public pension system by $30.5 million since 2000. The attorneys general in New York, Virginia and Florida have filed lawsuits over the same issue.

“This administrative action recycles baseless allegations, and, as we’ve stated previously, we are confident we will prevail on the facts and on the law,” Kevin Heine, a spokesman for BNY Mellon, said in a telephone interview. “We provide all clients with a valuable service at competitive prices and any suggestion otherwise is simply wrong.”

State Street Corp., based in Boston and a BNY Mellon rival, faces similar claims from California and Arkansas.

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.

Arms-Length Transactions

The banks have said 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. The plaintiffs have claimed the banks were obliged to act as an agent, obtaining for them the best possible exchange rate in the interbank currency market, and misled clients on how they set prices.

In the Massachusetts complaint, Galvin said BNY Mellon maximized revenues by executing purchases at the high end of the day’s price range and sales at the low end. A review of transactions for 2009 found more than 10 percent of trades were outside the high- and low-price ranges for that day, according to the complaint.

BNY Mellon reported $221 million in foreign exchange revenue in the third quarter, about 6 percent of its total. The bank earned $651 million in the quarter.

In an Oct. 19 conference call, Chief Executive Officer Gerald Hassell said that over the past two years the bank had seen increases in the volume of standing instruction trades.

Custody banks keep records, track performance and lend securities for institutional investors. They also manage investments for individuals and institutions.

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