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BNY Mellon Must Face U.S. Fraud Case Over Currency Trades

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April 24 (Bloomberg) -- Bank of New York Mellon Corp. must face a U.S. lawsuit that accuses the world’s largest custody bank of defrauding clients in foreign exchange transactions, a federal judge ruled.

U.S. District Judge Lewis Kaplan in Manhattan said the government could proceed with its claim that BNY Mellon misled clients by offering so-called best execution, or the best available market price at the time currency trades are executed, according to a decision filed today.

The government’s complaint contains allegations that “would permit the conclusion not only that bank employees knew their practices were inconsistent with an industry understanding of ‘best execution,’ but also took active steps to mislead their clients,” Kaplan wrote.

Manhattan U.S. Attorney Preet Bharara sued BNY Mellon in 2011, claiming that it misled clients of its foreign exchange services by concealing the way it was pricing trades, giving them “the worst or virtually the worst possible” interbank rate available during the trading day. He claims the bank defrauded clients of more than $1.5 billion.

BNY Mellon spokesman Kevin Heine said in a statement that the bank is pleased a number of claims were dismissed.

Related Lawsuit

“We look forward to addressing the remaining claims before the court,” he said. The bank is also fighting a related lawsuit by New York Attorney General Eric Schneiderman.

The U.S. sued using the Financial Institutions Reform, Recovery and Enforcement Act, a law passed in the wake of the savings-and-loan crisis.

BNY Mellon had argued it can’t be held liable under FIRREA because the law was designed to protect banks by penalizing third parties that harm depository institutions, not impose penalties on institutions for defrauding others.

In his decision, Kaplan rejected the bank’s argument, saying the law was passed to deter fraudulent conduct that might put federally insured deposits at risk.

“Just as Congress clearly intended to deter bank employees from engaging in fraud that results in harm to these institutions, Congress was entitled to conclude that penalties against financial institutions in cases like this would deter such institutions from similar, harmful, fraudulent conduct,” Kaplan said.

The case is U.S. v. Bank of New York Mellon, 11-6969, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: David McLaughlin in New York at dmclaughlin9@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

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