The United States Attorney And New York Attorney General Enter The Foreign Exchange Transaction Controversy

On October 4, 2011, the New York Attorney General and the United States Attorney for the Southern District of New York filed separate lawsuits against Bank of New York Mellon (BNY Mellon),1 both accusing the bank of defrauding clients in foreign currency exchange transactions. The lawsuits represent the latest development in an ongoing controversy regarding foreign currency transactions — BNY Mellon and a rival custodial bank have both been subject to investigations and/or lawsuits by the Securities and Exchange Commission and officials in at least seven states2 — that the banks say reflects prosecutors' fundamental misunderstanding of industry-wide practices. The New York state and federal complaints mark the introduction of two heavy-hitting statutes into the fray: The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)3 and New York's Martin Act,4 both of which allow recovery under less stringent standards, such as preponderance of the evidence, than would be required under criminal application of either the federal securities laws or New York State's fraud statutes.

The US Attorney's use of FIRREA is particularly significant. This litigation represents a new application of the statute, which was originally passed in the midst of the savings and loan scandals of the late 1980s, as part of the US Attorney's continued efforts to pursue civil alternatives to criminal charges against financial institutions. The recent filings are also of interest because, in an unusual move, both suits were filed on the same day for the same conduct, suggesting that there may have been a breakdown in cooperation between the US Attorney's Office and the New York Attorney General. Whether the result of friction or not, the parallel state and federal actions create challenges both for BNY Mellon, which will have to defend the case on two fronts and risk double exposure, and for the government lawyers.

The Foreign Exchange Transactions at Issue

As alleged in the complaints, the litigation centers around the foreign exchange services BNY Mellon offers to the custodial clients for whom it holds domestic and international financial assets. BNY Mellon offers two types of foreign exchange services: Customers may either negotiate an exchange rate with the bank's trading desk for each necessary currency trade or opt into the bank's "standing instruction" program.

Both the state and federal suits focus on the standing instruction program, pursuant to which clients authorize BNY Mellon to automatically exchange currency as needed.

The suits allege that BNY Mellon guaranteed its standing instruction customers that the currency transactions would be executed according to "best execution standards" or at the "best rate of the day," and that they would be completed free of charge.5 However, the suits also allege that BNY Mellon in fact determined the rate to charge for trades by reviewing the full range of prices at which the currencies traded over the course of the day, selecting the worst possible rate for each currency, and then charging customers a slight modification of that rate. According to the Attorney General's suit, this practice generated approximately $2 billion in profits for the Bank over the course of the last decade.6 The Attorney General is seeking not only disgorgement of profits under the Martin Act, but also treble damages and penalties under the New York State False Claims Act. The United States Attorney is seeking unspecified civil penalties and injunctive relief.

BNY Mellon has made it clear that it views the allegations in the complaints as completely inaccurate and that it intends to contest the suits vigorously.7 It has gone so far as to purchase a full-page ad in the New York Times proclaiming that the...