United States v. Bank of N.Y. Mellon
| Decision Date | 24 April 2013 |
| Docket Number | 11 Civ. 6969 (LAK) |
| Parties | UNITED STATES OF AMERICA, Plaintiff, v. THE BANK OF NEW YORK MELLON and DAVID NICHOLS, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Appearances:
Attorneys for Defendant The Bank of New York
Mellon
Stephen Fishbein
Daniel H.R. Laguardia
SHEARMAN & STERLING LLP
Attorneys for Defendant David Nichols
Table of Contents
Conclusion . . . . . . . . . . . . . . . . . 78
The United States brings this civil fraud suit against defendants The Bank of New York Mellon ("BNYM" or the "Bank") and one of its employees, David Nichols. The second amended complaint ("SAC") alleges that defendants engaged in a scheme to defraud the Bank's custodial clients by representing, among other things, that the Bank provided "best execution" when pricing foreign exchange ("FX") trades under its "standing instructions" program. In Southeastern Pennsylvania Transportation Authority v. Bank of New York Mellon Corp. ("SEPTA"),1 this Court held that one such custodial client had stated legally sufficient claims for breach of contract and breach of fiduciary duty based on similar alleged misrepresentations. This matter is before the Court on defendants' motions to dismiss the SAC for failure to state a claim upon which relief may be granted.
The government sues under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA").2 Section 951 of that statute3 permits the Attorney General 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."4 Although Section 951 has existed for nearly 24 years, it seems not to have been applied much. In fact, this decision marks the first occasion upon which a court has been called to interpret the meaning of the phrase "affecting a federally insured financial institution"under that section.
In particular, this case presents the following question of first impression by any court: whether a federally insured financial institution may be held civilly liable under Section 1833a for allegedly engaging in fraudulent conduct "affecting" that same institution. This question currently is presented in two other cases in this district.5
BNYM contends that it cannot be held liable on such a theory, arguing that the affected institution must be the victim of or an innocent bystander to the alleged fraud, not the perpetrator. The Court disagrees. In passing FIRREA, Congress sought to deter fraudulent conduct that might put federally insured deposits at risk. Where, as alleged here, a federally insured financial institution has engaged in fraudulent activity and harmed itself in the process, it is entirely consistent with the text and purposes of the statute to hold the institution liable for its conduct.
Regarding the merits of the fraud allegations, the complaint generally suffices to allege the principal claim here—that defendants fraudulently misrepresented their standing instruction service as providing best execution. As in SEPTA, the complaint plausibly alleges that the Bank priced its trades inconsistent with the industry understanding of the term, rendering defendants' representations at least misleading. While the government here has a burden to plead facts giving rise to a strong inference of fraudulent intent, the complaint does so. It contains allegations that, if proven, would permit the conclusion not only that Bank employees knew their practices were inconsistent with an industry understanding of "best execution," but also took active steps to mislead their clients about how trades were being priced.
This said, while the government adequately pleads a number of other alleged misrepresentations closely related to the notion of best execution, its theories of fraud on some other grounds are insufficient. Accordingly, defendants' motions to dismiss are granted in part and denied in part as detailed below.
The Court briefly provides an overview of BNYM's standing instruction program and the central representations and practices at issue in this case. Additional allegations, particularly those pertaining to the government's theory of fraudulent intent, are introduced in the discussion section as they become relevant. Further details about the standing instruction program from one customer's perspective may be found in this Court's decision in SEPTA.
BNYM is one of the world's largest custodial banks, holding on behalf of its clients domestic and international financial assets, including currency and securities.6 Its clients often need to engage in currency transactions in connection with the assets BNYM holds on their behalf.7 This occurs, for example, when a client earns dividends or other foreign currency income from its foreignassets or buys or sells a security in a transaction denominated in a foreign currency.8
BNYM has provided certain foreign exchange services to these custodial clients in two principal ways.9 First, the client may contact BNYM directly and execute a currency trade with BNYM at a price agreed upon at the time.10 Second, under its standing instruction service, BNYM automatically provides currency exchange as the needs arise.11 The standing instruction service relieves clients from having to negotiate individual FX trades in such circumstances, as BNYM handles the trade "from start to completion," setting the price itself.12 Only after the fact does the client learn the rate at which the exchange was executed.13
This case is about how the Bank set its prices for standing instruction trades. As this Court discussed in greater detail in SEPTA, the principal policies and procedures of the standing instructions program provided limited information about BNYM's pricing practices. They noted that the pricing would be no worse than certain prices set forth in a daily schedule each morning and deviate no more than three percent from the relevant interbank rate—the latter guarantee apparentlyto ensure compliance with ERISA requirements.14 The procedures did not state how BNYM would price the transactions aside from fulfilling these two guarantees, nor did they state expressly that BNYM otherwise was free to price the trades however it wished.15
The SAC alleges that defendants filled this void through various representations to clients conveying the impression that BNYM in fact was providing its clients the best prices it could obtain in the market at the times it executed the standing instruction trades.
The most important of these alleged representations was "best execution." "Best execution" allegedly is a term with an "industry definition" and is "commonly understood to mean that the client receives the best available market price at the time that the currency trade is executed."16 The SAC alleges that the Bank used this term on its website, in its responses to clients' requests for proposals (RFPs), and in other communications with clients.
In particular, the SAC alleges that BNYM's website—to which clients were referred—stated that one of the "benefits" of the service was "'FX execution according to best execution standards.'"17 ...
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