BNY Mellon Denied Second Bid to Dismiss Virginia Fraud Case

Bank of New York Mellon Corp., the world’s largest custody bank, failed a second time to win dismissal of the state of Virginia’s lawsuit accusing it of defrauding pension funds in foreign-currency trades.

A state judge in Fairfax, Virginia, today again rejected the bank’s argument that it can’t be sued under the Virginia Fraud Against Taxpayers Act because alleged false or fraudulent claims were never submitted to the state for payment.

Fairfax County Circuit Judge Terrence Ney, who ruled against a similar request by the bank in November, said during a hearing today the case may turn on the contracts between the pension funds and the bank.

“If they have a contract with the funds permitting them to earn a tidy sum for their work, they may be bad contracts for the funds but they may not be fraudulent,” Ney said.

The bank will have another opportunity to seek dismissal of the case at a hearing scheduled for Feb. 22. That hearing, which may last more than a day, will examine evidence produced by the bank in an effort to show it didn’t violate the law.

At today’s hearing, Virginia attempted, and failed, to resurrect another argument as to why the bank was liable under the anti-fraud statute.

‘Closely Scrutinize’

Brandy Bergman, a spokeswoman for the bank, said in an interview that the bank is pleased the court again rejected that argument and will “closely scrutinize the remaining claim at a hearing later this month.”

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.

“We are pleased that the judge has determined our complaint can move forward,” Brian Gottstein, a spokesman for Cuccinelli, said in an e-mail.

Attorneys general in New York and Florida have sued over the same issue. Massachusetts filed an administrative action against the bank.

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.

“Look at the account statements,” Reid Figel, a lawyer for BNY Mellon, argued at today’s hearing. “There’s nothing in those account statements that seek approval of a transaction.”

Joel Bernstein, a lawyer for Virginia, handed the judge a statement the Virginia retirement system received from the bank in February 2008 that he said shows the money coming into the retirement system as well as the expenses that were paid to BNY Mellon.

‘Numbers Don’t Tell’

“These numbers don’t tell the Virginia retirement system what else BNY is taking,” said Bernstein, a partner at Labaton Sucharow LLP in New York. “The bank is managing the money and pocketing some of it without letting the commonwealth know about it.”

Figel, a partner at Kellogg, Huber, Hansen, Todd, Evans & Figel PLLC in Washington, said the only thing the bank didn’t tell Virginia is “what margin we earned,” which he said the bank wasn’t required to do.

“There’s no fraud for failing to disclose information absent a duty to disclose,” Figel said.

The case is Commonwealth of Virginia v. Bank of New York Mellon Corp., 09-15377, Circuit Court for the County of Fairfax, Virginia (Fairfax).

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