Lewis Kaplan, US District Judge of the Southern District of New York announced his ruling yesterday, of denying BNY Mellon’s request to have the US’s FX fraud case against them dismissed. The case stems from a 2011 US government charge against BNY Mellon for FX fraud the bank committed against its clients. As one of the world’s largest custodian banks, BNYM offers FX services to clients to assist them in handling their multi-currency fund flows. Customer examples include transactions of foreign denominated securities and the receipt of dividends in foreign currencies.
The US Government is accusing BNYM of fraudulent behavior in relation to the methods used to conduct FX transactions for clients. Issues include miscalculations when netting multiple trades, misrepresentation of their ‘best Execution ’ practices, and mispricing trades. As such, BNYM clients were exposed to unfavorable order fills, while the bank benefited as it acted as the counterparty for these trades. According to the analysis conducted by the complaint, that during an 11 month period in 2009, average spreads for standing orders was 22.33 pips, versus 2.8 on negotiated phone calls, and 1.18 available on its eFX platform. As such, while standing orders represented only 12% of the bank’s FX volume, it accounted for 69% of the division’s profits. In addition to the abovementioned claims, the US government also charged BNYM of ‘mail fraud’ in its conducting of the standing orders. (link to the case)
Arguing against the charges, BNYM requested the dismissal of the case as they believe the US has no grounds to sue them. The government is using the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) which allows them to bring an action for civil penalties against anyone who violates any of a number of criminal statutes, including those prohibiting mail and wire fraud when the fraud is one “affecting a federally insured financial institution”. BNYM argued that no ‘federally insured financial institution’ were affected, thereby nullifying the US’s ability to charge the bank.
In Judge Kaplan’s conclusion, he accepted BNYM’s claim to dismiss the charges of mail fraud but denied BNYM’s argument that FIRREA couldn’t be used by the US government; thereby allowing the case to be held in court.
