BNY Mellon's FX Lawsuit Dismissed

A Fairfax County Circuit judge dismissed the foreign exchange (FX) pricing-related allegations against The Bank of New York Mellon Corporation (BK - Analyst Report). The allegations were brought by Virginia attorney general. This provides a big relief to the company, as it is already entangled it a number of similar lawsuits in other states.

The state judge in the ruling commented that Virginia cannot be allowed to proceed with the litigation under the Virginia Fraud Against Taxpayers Act, which necessitates the submission of a claim for payment. The court stated that BNY Mellon had only given the past accounting statements to Virginia and there was no demand for money in connection with the alleged overcharging of FX trade.

The Story Behind

The litigation, filed in August 2011, claimed that BNY Mellon had failed to provide the best possible prices while doing foreign currency trades for Virginia pension funds. The company was accused of charging the pension funds at the highest price of the trading day, instead of the actual inter-bank rate at which the currencies were originally purchased.

Moreover, in November 2011, BNY Mellon had won the partial dismissal of the lawsuit when the Fairfax County Circuit Court judge had dismissed two of the three charges that were filed against the company. However, the main accusation under Virginia Fraud Against Taxpayers Act had remained intact.

Similar Dismissals in the Past

In March 2012, a U.S. district judge in San Francisco had dismissed certain FX pricing-related allegations against BNY Mellon. The accusations under the California False Claims Act were also dismissed. However, the allegations related to the breach of fiduciary duty, breach of contract, unfair business practices and fraud by concealment were transferred to the state courts.

Likewise, in January 2012, BNY Mellon reached a partial settlement with U.S. regulators regarding the FX charges that were brought against it by the government. As per the terms of the deal, the company will be required to reveal how the prices were determined for these transactions. However, monetary settlement is yet to be reached.

Related Allegations

For the past several quarters, BNY Mellon has been facing similar litigations. Many states including New York, Florida, California, Ohio and Massachusetts have legally charged the company over similar allegations, such as misleading state and public pension funds, private companies, universities and banks via a scheme that overcharges foreign currency transactions.

BNY Mellon is not the only company that has been accused by the states for overcharging the pension funds. Back in 2009, the state of California had charged State Street Corp. (STT - Analyst Report) for improperly pricing foreign exchange for California pension funds.

Conclusion

The dismissal of the lawsuit is obviously a relief for BNY Mellon. While the company is under tremendous pressure due to the rising expenses, these lawsuits would further increase its costs. Also, these FX lawsuits will force the clients to reconsider their business ties with the company.

Currently, BNY Mellon retains its Zacks #3 Rank, which translates to a short-term Hold rating. Moreover, in the absence of any significant positive or negative catalyst, we maintain a long-term Neutral recommendation on the stock.