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BNYM Settles Forex Claims for $504 Million In Restitution to its Domestic Custodial Clients

November 5, 2015

On September 24, 2015, Judge Lewis A. Kaplan of the United States District Court for the Southern District of New York approved a class action settlement between the Bank of New York Mellon (“BNY Mellon”) and 1,218 of its domestic custodial clients who used the Bank’s automated foreign exchange service, called “standing instructions,” from 1999 through 2012. Kessler Topaz served as the court-appointed lead class counsel in the litigation. Through the settlement, the Bank’s custodial clients will recover $504 million in hidden foreign exchange fees that BNY Mellon charged them over the 13-year class period.

The settlement follows four years of highly contested litigation which Kessler Topaz commenced in March 2011 on behalf of the Southeastern Pennsylvania Transportation Authority (“SEPTA”), and a similarly situated class of BNY Mellon custodial clients. The plaintiffs’ claims stemmed from the Bank’s contractual promises to its custodial customers who used standing instructions that the service would, among other things, provide “best execution,” “the best rates of the day,” “extremely competitive” market-based rates for foreign exchange transactions, and that these services would be provided “free of charge.” In fact, the opposite was true. In executing foreign exchange transactions for standing instruction clients, BNY Mellon would execute client transactions at the prevailing interbank market rate and then wait to observe the entire day’s interbank trading range for that particular currency pair, select the least advantageous rate of the trading day, and assign its clients this second disadvantageous rate. The spread between the rate assigned to the client and actual rate achieved in the market would be pocketed by the Bank as pure, riskless, profit. Because BNYM’s clients did not know when in the trading day BNY Mellon executed FX transactions through the standing instruction program, and since the assigned rate fell within the trading day, there was no reason to suspect that their FX rates were not “best execution.” The rates, instead, were orchestrated to maximize BNY Mellon’s profits.

BNY Mellon’s practices came to light through a whistleblower who filed statutory claims on behalf of a number of public pension funds in Virginia, California, Massachusetts and New York who used Bank of New York as their custodian. The whistleblower’s claims were unsealed in early 2011. SEPTA, a long-standing custodial client of BNY Mellon, through KTMC, conducted a statistical analysis of the rates it had achieved through Mellon and Bank of New York’s standing instruction service, and the results of the analysis revealed that SEPTA’s FX rates, over time, were heavily skewed towards the worst rates of the interbank trading range for the day. This strongly suggested that BNY and Mellon, together with the post merger entity, BNY Mellon, were manipulating the foreign exchange rates obtained through the standing instruction service to the detriment of all their custodial clients. In March 2011, SEPTA brought the first nationwide class action suit against BNY Mellon and its predecessor entities for breach of contract and breach of fiduciary duty in the U.S. District Court for the Eastern District of Pennsylvania.

By June 2012, several actions had been commenced against BNY Mellon arising from its standing instruction service, including civil fraud claims by the U.S. Attorney for the Southern District of New York and state fraud claims by the New York Attorney General. Other civil class actions were proceeding in California and Ohio, and these actions were transferred to the Southern District of New York and consolidated with SEPTA’s case (the “Customer Class Cases”). All these cases were ultimately coordinated for discovery before Judge Kaplan in the U.S. District Court for the Southern District of New York. What followed from this coordination was an unprecedented collaboration between the United States Attorney, the New York Attorney General and the private plaintiffs, steered by Kessler Topaz and its co-counsel. BNY Mellon mounted an aggressive defense of its highly lucrative FX practices, which included filing counterclaims against SEPTA and the other plaintiffs in the litigation, seeking attorneys’ fees for defending not only SEPTA claims, but the claims brought by the U.S. Attorney and NYAG, and, as explained below, pursuing onerous discovery against plaintiffs and third party investment managers, consultants and putative class members.

Over the course of the litigation, the parties and third parties exchanged in excess of 28 million pages of documents and took 110 depositions of parties and non-parties. There were several discovery motions filed by the parties, including motions for protective orders by Plaintiffs to attempt to limit BNY Mellon’s discovery onslaught against third parties. BNY Mellon’s central defense of the case focused on whether an industry standard existed for “best execution” in foreign exchange and whether class members could be unified under a common theory of harm or contract. To this end, Defendants conducted over 30 depositions of plaintiffs and their agents, and an additional 24 depositions of third parties. Judge Kaplan characterized BNY Mellon’s defense of the case as “scorched earth.” Meanwhile, Plaintiffs had to stitch together a coherent theory of contractual and fiduciary breach that spanned a period of 13 years over three different corporate entities, across FX trading and sales desks in three countries (U.S., U.K. and Belgium). In developing their proof, Plaintiffs deposed over 56 BNY Mellon current and former employees, retained several experts and prepared expert reports, and were poised to commence class certification briefing at the time the case settlement.

In February 2015, following a three-day mediation before the Honorable Layn Phillips (Ret.) a highly-respected, experienced mediator and retired federal judge, the parties reached an agreement to settle all claims asserted in the Customer Class Cases for $335 million, subject to Court approval (“Settlement”).

Simultaneously with the settlement of the Customer Class Cases, the U.S. Attorney reached a settlement of $167.5 million with BNY Mellon as well as remedial relief including the termination of certain officers associated with the unlawful conduct at issue in the litigation. The New York AG also reached a $167.5 million settlement with BNY Mellon and agreed to contribute $155 million of that recovery to the Customer Class. Separately, the Department of Labor which had been investigating BNY Mellon’s conduct, but which had not separately brought suit, reached a $14 million accord with BNY Mellon and agreed to contribute the entire recovery to those members of the Customer Class which were ERISA funds. In sum total, the Settlement resulted in a gross recovery to the Customer Class of $504 million. The recovery amounts to 35% of the revenues that BNY Mellon and its predecessors earned on standing instructions over the 13 year class period.

The settlement is a historic result on many fronts. As Judge Kaplan observed at the final approval hearing held on September 24, 2015, the case served as a “model for federal and state cooperation.” The average net recovery by Customer Class Members is $400,000, with more than 100 class members receiving net recoveries in excess of $1,000,000. Moreover, through the commencement of litigation, BNY Mellon was compelled to overhaul its foreign exchange practices to provide more disclosure and more options for its custodial clients to achieve better transparency and rates for foreign exchange. In granting final approval of the Settlement from the bench, Judge Kaplan praised plaintiffs’ counsel for a “wonderful job,” recognizing that they were “fought tooth and nail at every step of the road.” In further recognition of the efforts of plaintiffs’ counsel, Judge Kaplan noted that “[t]his was an outrageous wrong by the Bank of New York Mellon, and plaintiffs’ counsel deserve a world of credit for taking it on, for running the risk, for financing it and doing a great job.” We anticipate that the net settlement proceeds will be distributed to class members before year end.

A motion for distribution of the settlement has been filed with the Court and distribution to Customer Class Members will begin promptly after the Court’s entry of the distribution order.

For more information regarding the settlement, please visit the settlement website at http://www.bnymellonforexsettlement.com/

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