On March 20, 2015, the Attorney General of New York announced that a $714 million settlement had been reached to resolve allegations that the Bank of New York Mellon (“BNYM”) falsely told investors that it offered the “best rates” on securities trading involving foreign exchanges, even though BNYM allegedly assigned investors the worst rates, while obtaining the best rates for itself and pocketing the difference.
BNYM customers use foreign exchange (“FX”) services when buying or selling foreign securities or converting foreign investment income to U.S. dollars. FX rates fluctuate throughout the trading day or session. According to the lawsuit, BNYM told its customers that its Standing Instruction FX program was an automated service that BNYM used to obtain the best FX rates for its customers. But rather than obtaining the best exchange rates for its customers, BNYM allegedly waited until the end of the trading day or session and assigned its customers the worst—or close to the worst—rates. At the same time, BNYM supposedly assigned itself the most favorable rates and profited on the spread between the two rates.
The State’s investigation began in 2009 with a whistleblower complaint spearheaded by Harry Markopolos, the financial expert that alerted federal authorities to the now-infamous Bernie Madoff Scandal. The case was filed under the New York State False Claims Act, which provides incentives for whistleblowers to come forward with evidence of fraud against the State. Interestingly, the alleged fraud in this case was not against New York directly, but against public entities such as state pension funds and colleges that relied on BNYM to invest their income.
Out of the $714 million settlement, New York State and the Department of Justice will each be allocated $167.5 million. Under the New York State False Claims Act, as well as the Federal False Claims Act, whistleblowers are entitled to 15-25% share of any recovery obtained by the government.
This settlement is good news for whistleblowers with knowledge of financial services fraud not only due to its size, but also because it suggests that both state and federal prosecutors are willing to take a broad view of what constitutes fraud under the False Claims Act to include fraud against entities holding public funds for investment purposes.