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According to Bloomberg, last week, Bank of New York Mellon Corp. (BK - Analyst Report) agreed upon a settlement over charges levied against it by Virginia's employee pension fund. The company was accused of charging the pension fund at the highest price of the trading day, instead of the actual inter-bank rate at which the currencies were originally purchased.
Terms of the agreement include payment of $1.14 million to Grant Wilson, who was working as a foreign exchange trader at the bank and came up with the allegations. Moreover, the settlement proposes the termination of the lawsuit against the bank by Virginia.
Additionally, BNY Mellon has struck a five-year custody deal with the Virginia retirement system. As per the terms of the deal, the bank will continue to offer custody, securities and foreign-exchange services to the Virginia retirement system at lower fees. Also, the contract includes a choice for another five-year renewal.
This settlement is the start to a series of suits faced by BNY Mellon after such accusations caught the eye of institutional clients. 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.
The Story Behind
A Fairfax County Circuit judge dismissed the foreign exchange (FX) pricing-related allegations against BNY Mellon in May 2012. The litigation, filed in August 2011, claimed that BNY Mellon had failed to provide the best possible prices while conducting foreign currency trades for Virginia pension funds. The allegations were brought by Virginia attorney general.
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.
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.
The dismissal of the lawsuit comes as a relief for BNY Mellon. While the company is under tremendous pressure due to the rising expenses, these lawsuits would further alleviate its costs. Also, these FX lawsuits will force the clients to reconsider their business ties with the company.
With the settlement of the lawsuits, BNY Mellon plans to move forward with its business strategies. Moreover, pending lawsuits can further trigger financial hassles while tarnishing the company’s image. Therefore, it is in the interest of the company to resolve such matters at the earliest.
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.