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As per a Reuters report, after the pension funds related charges, Bank of New York Mellon Corp. (BK - Analyst Report) is now being pressured by Fidelity Investments – one of the largest mutual funds and financial services groups – to maintain stringent pricing standards on foreign currency trades. As mentioned in a number of lawsuits filed against BNY Mellon, Fidelity has also been overcharged by the bank in pricing on certain foreign exchange (FX) trades having standard order.
BNY Mellon is not the only bank to have been accused by the states for overcharging the pension funds in relation to FX trades. Back in 2009, the state of California had charged State Street Corp. (STT - Analyst Report) for improper pricing of foreign exchange for California pension funds.
The banks had resorted to such fraudulent moves driven by the downtrend in foreign-exchange business due to volatile markets. In the third quarter of 2012, BNY Mellon recorded total revenue of $121 million for foreign-exchange trading, plummeting 45% on a year-over-year basis.
Therefore, BNY Mellon, leveraging on clients like Fidelity, overcharged them for extra revenue and subsequently entangled itself in a number of lawsuits filed by the U.S. Department of Justice (DOJ) and others. In the U.S. District Court in the Southern District of New York, BNY Mellon is fighting a civil fraud case of more than $1 billion, pursuing by the Justice Department. The bank squabbles in court filings arguing its trade-pricing policies were allowable and did not violate any laws.
Though Fidelity has not filed any lawsuit against BNY Mellon, DOJ filings show that the mutual fund firm has faced losses worth over $50 million on standing instruction trades with BNY Mellon from 2007 to 2010.
BNY Mellon’s representative argued that the bank’s foreign-exchange products continued to grow attributable to client demand and market conditions, while refraining from any comments on Fidelity.
Owing to such issues, customers have grown wary and are demanding detailed description of their standing instruction FX trades. This, in turn, has affected the banks revenue. The revenue from foreign exchange and other trading activities, which used to account for 12% of the total fee revenue of BNY Mellon, has declined to 6% in the third quarter, after the slew of lawsuits against the bank. We believe such fraudulent practices by BNY Mellon have tarnished its reputation.
While BNY Mellon is under tremendous pressure due to the rising expenses, these lawsuits would further alleviate its costs. Also, in effect, these FX lawsuits force the clients to reconsider their business ties with the company.
Moreover, piling lawsuits can further trigger financial hassles while blemishing the companys image. Therefore, it is in the best 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. Considering the fundamentals, we also maintain our Neutral recommendation on the stock.