Secret Informant Surfaces in BNY Currency FX Probe

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Carrick Mollenkamp – October 21, 2011

For a decade, Grant Wilson toiled on a small trading desk at Bank of New York Mellon Corp. in Pittsburgh, buying and selling currencies for the bank's biggest clients.

Mr. Wilson also had another job: For the last two of those years he was a secret whistleblower, assisting currency-trading investigations of BNY Mellon, according to people familiar with the matter.

His input culminated with the filing last week of separate civil lawsuits by the Justice Department in federal court and New York attorney general in state court alleging that BNY Mellon systematically overcharged investors on billions of dollars of currency trades, defrauding or misleading them for a decade.

The suits seek a total of more than $2 billion from the bank. BNY Mellon denies wrongdoing and is fighting the legal actions.

The allegations against BNY Mellon represent one of the broadest enforcement efforts ever against banks that trade in global currencies—one of the world's biggest financial marketplaces. Massive pension funds that oversee hundreds of billions of dollars for teachers, police and firemen and retirees now are questioning whether they got a fair shake on currency transactions that generated profits for the banks.

Until now, Mr. Wilson's identity remained a closely kept secret. His role as a lone whistleblower against BNY Mellon went undetected even as the bank's lawyers looked for a whistleblower.

He left the bank this year after providing information and documents that helped the government and a whistleblower legal group. To pull off two years of secrecy, he and his legal team used a shell partnership in Delaware, met on a Saturday so Mr. Wilson wouldn't be missed at the office, and talked strategy at anonymous restaurants.

Mr. Wilson, along with two lawyers and two other whistleblowers in a separate case, are part of a group that includes Harry Markopolos—the fraud investigator best known for his early, and correct, suspicions that Bernard Madoff's multibillion-dollar investment empire was a fraud. Mr. Markopolos says his group's currency-trading allegations have roots in a hunch he had in 2006 that currency-trading costs might be causing unusual gaps in investment returns.

The group first filed their own lawsuits against the two banks, using information from the whistleblowers, according to people familiar with the matter. State attorneys general then ultimately filed their own lawsuits in four states, believing the whistleblower claims had merit. The whistleblower group can seek a share of as much as 25% of any recovery the states obtain in many of the cases.

State attorneys general in Virginia, Florida and New York and the Justice Department allege BNY Mellon overcharged major clients by giving them unfavorable currency-exchange rates. The alleged fraud involved banking clients that don't negotiate currency trades themselves, but instead give "standing instruction" to a bank to trade for them. These clients usually aren't trading currencies for profit, but simply need foreign money to do transactions overseas.

Mr. Wilson described to his lawyers, and later, law-enforcement officials, how the alleged scheme worked at BNY Mellon and provided internal documents showing the bank's profits. The Wall Street Journal pieced together this account of his role from court documents and extensive interviews with bankers, lawyers and people familiar with the government inquiries.

Mr. Wilson, 52 years old, declined to comment.

In a related case, state prosecutors in California have sued rival State Street Corp., accusing it of improperly pricing currency trades. The Securities and Exchange Commission also is investigating State Street, according to a regulatory filing. State Street strongly denies the allegations.

BNY Mellon sought to discover the insider's identity and to fight the lawsuits. The 225-year-old bank also set up a website to answer client questions and last week ran full-page advertisements in major newspapers saying the claims against it "are flat out wrong and we will fight them in court."

A BNY Mellon spokesman rejected the notion the bank provided "least favorable" currency rates to clients. "We provide competitive wholesale pricing for retail-sized transactions," he said, adding "our clients and their investment managers have full discretion to execute foreign-exchange trades through us or any other provider."

Mr. Wilson, an expert in trading Japanese yen, worked on a BNY Mellon trading desk in Pittsburgh, some 375 miles from the bank's headquarters at One Wall Street in New York. On that desk, the whistleblower—identified by people familiar with the situation as Mr. Wilson—"had extensive personal contact with the employees and executives" behind the alleged fraud, according to the Virginia attorney general's complaint.

According to the Virginia and Florida attorney general suits, a separate "transaction desk" was responsible for collecting the currency trades made for the bank's "standing instruction" clients and then setting the price at which the bank would record those transactions. The prices often were at or near the day's least favorable exchange rates, state attorneys general and prosecutors allege, with the bank profiting from the difference.

State attorneys general allege that emails and internal communications from BNY Mellon show executives endorsing the alleged currency-transaction practice, favoring certain clients with better pricing, and worrying that profit margins would fall if the bank were more transparent. The ability of bank clients to monitor transactions more closely would "reduce margins dramatically," according to an email in Virginia's lawsuit, filed in August in state court.

As the BNY Mellon currency-trading investigations grew, Mr. Wilson's colleagues in the office wondered who the whistleblower might be, according to people familiar with the situation. Mr. Wilson's lawyers gave him language to use if he were ever questioned: He was to refer to himself as a "relator"—a whistleblower, in legal parlance—and say, "I'm pursuing a false-claims case against this company." The explicit language was designed to give Mr. Wilson legal recourse if the company were to retaliate against him for being a whistleblower, these people say.

The investigations focus on an opaque area of the foreign-exchange business, where $4 trillion is traded daily. BNY Mellon and State Street are two of the world's largest "custody" banks, which specialize in processing trades and handling administrative tasks for global money managers including pension funds, corporations, universities and other banks.

Mr. Wilson's decision to become a whistleblower started with Mr. Markopolos, the fraud investigator, who had the 2006 hunch about currency-transaction costs. Over the past four years, he and his legal team contacted Mr. Wilson and two former State Street employees, Peter Cera and Ryan Gagne, to secretly help build cases against the two banks. The whistleblower group is led by two lawyers, Michael Lesser in Boston and Philip Michael in New York.

Working with the legal team, Mr. Markopolos arranged clandestine meetings with the whistleblowers at a shopping center and hotel restaurants. The secrecy paid off. Messrs. Cera and Gagne's names have remained confidential until now. The two former State Street employees declined to comment.

The group organized Delaware partnerships, with the three whistleblowers as the partners, in order to keep their identities out of public view. Messrs. Lesser and Michael are the lawyers for the partnerships. Mr. Markopolos works as a litigation consultant to the lawyers.

The reconstruction of the whistleblower group's formation is based on court documents, obituaries, real-estate records, currency-trading industry materials and the accounts of 10 people familiar with the situation.

Mr. Markopolos's hunch came from a book by Yale University's chief investment officer, in which a description of currency transactions stuck out: "Foreign exchange translations may influence returns in a substantial, unpredictable manner." Mr. Markopolos also noticed that pension funds using outside money managers reported slightly lower returns than the money managers themselves.

He asked a friend who had worked at State Street, who told him that custody banks typically charge pension funds unfavorable foreign-exchange, or FX, prices. The friend told Mr. Markopolos, "No one ever checks FX."

He strategized about how to find bank insiders who could help him look into his suspicions. A key tactic: Looking for traders who might be sympathetic, then cold-calling them and saying, "I have a better job for you."

Working from a small home office in Whitman, Mass., he began to try to contact whistleblowers, including Mr. Cera whom he knew through the Boston securities and banking community. A former senior currency researcher at State Street, he told Mr. Markopolos that allegedly improper currency trading was one reason he had left State Street.

Mr. Wilson's role went undetected even as the bank's lawyers looked for a whistleblower.

Mr. Markopolos asked Mr. Cera for another State Street insider. He suggested Mr. Gagne. By this time, Mr. Gagne also had left State Street, where he was a currency salesman and worked with the bank's computer systems. Mr. Gagne eventually agreed to join.

In April 2008, the whistleblower team, using information from Messrs. Cera and Gagne, filed a sealed lawsuit against State Street on behalf of two major pension funds, California State Teachers' Retirement System and the California Public Employees' Retirement System, or Calpers.

The suit was filed by an anonymous Delaware partnership called Associates Against FX Insider Trading. It alleges State Street charged the two California funds unfavorable currency rates, determining the prices between 4 p.m. and 5 p.m. each day so the bank could take advantage of daily price fluctuations. The complaint says State Street referred to public pension funds as "dumb" clients compared with "smart" clients who negotiated currency trades to get a better rate.

In a statement, a State Street spokesman said, "Neither Mr. Cera nor Mr. Gagne's job responsibilities included managing or executing indirect FX transactions." She said Mr. Cera left in 2001 and Mr. Gagne left in 2004, well before the 2008 complaint filed in California. She said the bank offers "clients and their investment managers a range of FX execution options and transparency as to our pricing methods" and that the bank will defend against the California allegations.

Meantime, Mr. Markopolos and the legal team contacted Mr. Wilson. Both Messrs. Cera and Wilson had worked at State Street.

On Sept. 12, 2009, Mr. Wilson met with the two lawyers, Messrs. Lesser and Michael, in Boston on a Saturday at Mr. Lesser's firm, Thornton & Naumes. Mr. Wilson didn't take much time away from work and didn't want to raise any suspicions by being out, according to people familiar with the situation.

Mr. Wilson and the lawyers discussed what was at stake during a three-hour meeting. Mr. Wilson claimed that all the standing-instruction trades were made at the same time in the afternoon, according to court documents.

In fall 2009, California's then-attorney general, Jerry Brown, sued State Street in Sacramento state court. In a news release, Mr. Brown cited the whistleblowers's earlier suit and alleged that the bank had charged the state's pension fund at or near the "highest rate of the day." The state estimated that damages and penalties could exceed $200 million.

The State Street lawsuit in California quickly caused headaches over at BNY Mellon. An internal BNY Mellon monthly business report in November 2009 said, "The fallout from the State of California vs. State Street lawsuit continues. To date BNYM has received 42 queries from clients questioning our policies and procedures."

In late October, the whistleblower group finalized suits against BNY Mellon in several states. The group filed papers to form a Delaware general partnership called "FX Analytics" to provide anonymity for Mr. Wilson. They soon filed suits in Virginia, Florida, New York and several other states, according to people familiar with the matter, all of which remain under seal.

The Virginia and Florida filings alleged that BNY Mellon cherry-picked the least-favorable rates for pension funds. Using the whistleblower's information, the suit listed specific amounts of standing-instruction trades—$5.375 billion—that had been processed through a Pittsburgh desk in July 2009. The lawsuits referred to a "relator" who "possesses extensive knowledge and experience regarding (BNY Mellon's) bank offices, businesses and personnel, including personal contact with the employees and executives of BNY Mellon ... who have committed the alleged violations."

The whistleblower suits remained a secret until earlier this year. In January 2011, Virginia Attorney General Kenneth Cuccinelli II intervened and took control of the suit against BNY Mellon in a move that unsealed the 2009 FX Analytics complaint. Florida Attorney General Pamela Jo Bondi did the same.

Those moves were the first public indication that someone inside BNY Mellon was aiding litigation against the bank. Inside BNY Mellon, Mr. Wilson feared his role would be revealed. Friends and colleagues openly discussed who the insider might be.

However, Mr. Wilson was never confronted. Earlier this year he told his boss he was retiring. He moved from Pittsburgh to New England in July.

On Aug. 11, Virginia's Mr. Cuccinelli sued BNY Mellon, alleging the bank had given a fake currency-transaction price to Virginia funds on more than 73,000 trades. The complaint said the "relator" was "employed in the FX trading department at (BNY Mellon) in Pittsburgh" and that "the relator observed (BNY Mellon's) FX trading for its custodial clients and learned directly that the FX scheme described herein was orchestrated and demanded by the senior executive staff of the Bank."

Last week, New York's attorney general intervened and filed its own suit, and the Manhattan U.S. attorney's office also filed suit. Both lawsuits kept secret the role Mr. Wilson played.

Original article on Wall Street Journal website