(Bloomberg) — Bank of New York Mellon Corp., the world's largest custody bank, will pay $714 million to settle allegations by the U.S. and New York state that it defrauded clients in foreign-exchange transactions for as long as a decade.
New York began its case after a whistle-blower lawsuit was filed in 2009 under the state's False Claims Act. The scheme allegedly defrauded thousands of clients nationwide, including public and private pension funds and federally insured financial institutions.
As part of the deal, the bank agreed to repay $84 million to employee benefit plan customers who were victimized through the bank's "standing instruction" foreign-exchange trading program.
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Also, the bank will end the employment of certain executives who were involved in the practices.
"This case is a reminder that financial institutions charged with safeguarding retirement plan assets sometimes put the institution's interests ahead of those of the investors they represent," said Secretary of Labor Thomas E. Perez. "Today's settlement offers more proof that when they do so, we at the department along with our colleagues at federal and state agencies will hold them accountable."
Federal and New York officials alleged that the bank systematically misled investors about foreign exchange deals by promising it would execute trades based on the best rates available. Instead, the bank obtained the best rates for itself and gave less favorable terms to customers, pocketing the difference, officials said.
"Motivated by outsized profits and bonuses," the bank and its executives, "repeatedly misled clients to believe that the pricing they were getting on foreign exchange was far better than it actually was," Manhattan U.S. Attorney Preet Bharara said in a statement. "The bank repeatedly deceived its customers and is paying a heavy penalty for it."
The DOL said that, based on its investigation, the bank "had engaged in a deliberate, prolonged effort to conceal its pricing methods."
The department said the bank's failure to work "prudently and solely" in the interest of the plans represented breaches of the bank's fiduciary duties to the plans and violated the Employee Retirement Income Security Act.
BNY Mellon last month restated fourth-quarter earnings after boosting litigation expenses by $598 million in anticipation of settling legal matters, including lawsuits related to foreign exchange.
The settlement will end lawsuits brought by Bharara and New York Attorney General Eric Schneiderman as well as some private litigation, according to a joint statement by Bharara and Schneiderman.
In a separate statement, the bank said it's "pleased to put these legacy FX matters behind us, which is in the best interest of our company and our constituents."
The Justice Department and New York will each receive $167.5 million. Schneiderman said he'll use his share of the funds to compensate customers who were victims of the fraud, including the New York State Deferred Compensation Plan and the State University of New York.
The Labor Department will receive $14 million and the SEC will get $30 million, according to the bank. The company has agreed to pay $335 million to settle the customer class-action litigation.
The bank has also agreed to increase the amount of information it gives to customers, officials said.
Custody banks keep records, track performance and lend securities for institutional investors. BNYMellon also manages investments for institutions and individuals.
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