The New York attorney general and the United States attorney in Manhattan filed separate lawsuits on Tuesday against the Bank of New York Mellon, accusing it of cheating state and other pension funds nationwide out of foreign exchange fees over the last decade.
In a civil lawsuit filed in state court, the attorney general, Eric T. Schneiderman, said that the Bank of New York Mellon had consistently overcharged customers for processing foreign currency transactions. He is seeking about $2 billion, which is the ostensible ill-gotten profits that the bank generated over the last decade.
Preet S. Bharara, the United States attorney in Manhattan, filed a civil complaint in Federal District Court in Manhattan that also charges the Bank of New York Mellon with defrauding its customers in the foreign exchange markets. Whereas Mr. Schneiderman is seeking redress on behalf of state pension funds, Mr. Bharara is seeking hundreds of millions of dollars in penalties on behalf of the United States.
“This suit seeks to impose not only appropriate civil penalties, but also comprehensive injunctive relief to ensure that Bank of New York’s alleged fraud stops now,” Mr. Bharara said.
Among those affected by the bank’s actions were pension funds operated by the State University of New York and New York City retirees, as well as thousands of investment funds, including some run by Duke University and Walt Disney.
In separate statements, Bank of New York Mellon vigorously denied any wrongdoing. It claimed that the United States attorney's accusations were based on "flawed analysis" of its role as a principal in the foreign exchange market, and said the attorney generals' lawsuit was an example of "prosecutorial overreach." The bank said it was confident that it had provided competitive and attractive foreign exchange rates to its customers.
Still, bank officials recognize the impact that the drumbeat of bad publicity has on their brand. The bank's newly installed chairman and chief executive, Gerald L. Hassell, has said he will be pragmatic about resolving any suits.
Mr. Schneiderman’s lawsuit charges that the bank guaranteed that customers would receive the most competitive or attractive rates available on any given trading day. In reality, the lawsuit says, the Bank of New York Mellon provided the opposite: the worst or nearly the worst of the rates available to the bank. Then it earned nearly $2 billion — or as much as 75 percent of its foreign exchange revenue — by pocketing the difference, the suit contends.
The New York attorney general’s action comes after similar moves by authorities in California, Florida, Massachusetts and three other states that are looking into the foreign exchange practices of the Bank of New York Mellon and one of its main competitors, the State Street Corporation. The Securities and Exchange Commission and Justice Department are also in the middle of investigations, according to corporate filings from the banks.
The inquiries began almost two years ago when a group of whistle-blowers made up of plaintiffs’ lawyers and Harry M. Markopolos, the financial investigator who first sounded the alarm about Bernard L. Madoff’s Ponzi scheme, sought out the New York state attorney general’s office to bring lawsuits against the bank.
But by taking advantage of the powerful New York state securities law known as the Martin Act, Mr. Schneiderman has turned it into a national case. The lawsuit seeks to recover damages incurred not only by the New York pension funds, but also by dozens of government and private investors across the country.
It is not the first time Mr. Schneiderman has squared off against the Bank of New York Mellon. He recently moved to block a proposed $8.5 million settlement involving the bank and the Bank of America over troubled loan pools issued by Countrywide Financial. The suit accuses the Bank of New York Mellon of fraud in its role as trustee overseeing the investment pools, a claim the bank has denied.
Mr. Schneiderman has not shied away from fights with other big banks. In the continuing settlement talks with the nation’s largest mortgage servicers, Mr. Schneiderman stepped down from the lead committee of attorneys general after making it clear that he would not sign a broad release that would allow the banks to avoid liability for an array of issues. His office is now conducting its own investigation.
Mr. Bharara brought his lawsuit against Bank of New York Mellon under the Financial Institutional Reform, Recovery and Enforcement Act, a law that gives federal prosecutors the right to seek civil penalties for banking-related violations. Congress passed the law in 1989 in the wake of the savings-and-loan crisis, giving the government a civil prosecutorial tool with a lower burden of proof than federal criminal statutes.
This year, Mr. Bharara’s office used another law, the False Claims Act, to file a complaint against Deutsche Bank, claiming that one of its units had lied about the quality of government-backed mortgage loans it underwrote. Deutsche Bank has denied the claims.