State Street Corp has unveiled a new twist in its legal defense against charges of foreign exchange fraud: We're not like Bank of New York Mellon Corp.
While both custody banks deny they routinely overcharged state pension fund clients on foreign-exchange trades, State Street is trying to score points in court by highlighting differences in the phrases it used in marketing materials, sometimes buried deep in the fine print.
BNY Mellon frequently told pension fund clients that it provided forex trades "free of charge." Boston-based State Street was less direct in some of its promotional material, often describing its forex trades as "based on" market prices.
What's a few words among banks and their pension fund clients?
Plenty, as it turns out.
"Cases can very much turn on words," said Anthony Sabino, a lawyer and business professor at St. John's University. "Certainly courts will disregard what's deemed to be salesmanship and puffery. But they can also hold these banks to the language they use."
The banks got into trouble by promoting seemingly lower wholesale-type pricing on small, retail-size forex trades called standing instruction transactions. So-called negotiated trades, used by larger forex traders, account for most of the banks' volume, but standing instructions are usually much more profitable.
Pension funds in California, Florida, Massachusetts, New York and Virginia, for example, claim the banks got their frothy profit margins by loading them up with hidden price markups. Both banks have said those claims have no merit.
State Street recently balked at comparisons to BNY Mellon in a federal court when an Arkansas pension fund attempted to link the Boston-based custody bank to its New York-based archrival.
The bank said it "did not provide that FX trades would be executed 'free of charge.'" The Arkansas Teacher Retirement System's "attempt to analogize to BNY is misplaced," State Street said in a filing in U.S. District Court in Boston. MEANING OF FREE
Pension funds and prosecutors going after BNY Mellon have put the "free of charge" phrase at the center of some of their arguments.
As part of a recent motion to dismiss the government's case in U.S. District Court in Manhattan, BNY Mellon dedicated about one-third of its 35-page response memo just to defending "free of charge" and other pricing language.
"A price that includes a profit margin or 'spread' over the seller's cost is not a charge," BNY Mellon's lawyers wrote.
"Even assuming there were some ambiguity in the phrase 'free of charge,' BNYM's website elsewhere made clear that BNYM assigned rates to its standing instruction transactions that reflected a mark-up over its cost of funds," the lawyers wrote later in the memo.
The U.S. Attorney in Manhattan accuses BNY Mellon of committing $1.5 billion in fraud in the case, saying the bank provided false or misleading information about forex pricing.
"BNYM's standing instruction service was anything but free of charge," the federal prosecutor said in its civil complaint. "Nor did it minimize clients' costs. Rather, BNYM's pricing scheme enabled it to earn a substantial and undisclosed fee."
In the view of BNY Mellon's top management, the sophisticated investment managers who acted on behalf of pension funds would never think the custody bank was executing forex trades for nothing.
"Our clients and their investment managers understand the FX market and are paid as fiduciaries to determine what is in the best financial interests of their funds," the bank states in the letter. "They also understand that no rational institution provides global FX services, and assumes the attendant principal risks, for free."
The bank last week scored a partial legal victory when a federal judge dismissed false claims allegations in a California case. But the full phrase "free of charge" disappeared from the section of BNY Mellon's website about forex trades in January after negotiations with the Justice Department.
The banks' backing away from their prior marketing language indicates how legally harmful the phrase may be, according to Patrick Burns, head of communications at Taxpayers Against Fraud. The Washington-based nonprofit helps plaintiffs bring complaints against companies using the U.S. False Claims Act.
"That doesn't look good," Burns said. "They also have to change the way they do business. This was a huge money-making deal for the banks."
BASED ON WHAT
State Street, meanwhile, has its own word battle to fight.
The Arkansas Teacher Retirement System, for example, argued that State Street promised to make forex trades "based on" wholesale market rates. As a result, the pension fund says it should have gotten better prices than it did.
But State Street's lawyers disagreed, arguing that the words "based on" do not mean the same as "equal to."
The pension fund lawsuits have changed client behavior in the marketplace. Massachusetts' $50 billion-plus pension fund, for example, fired BNY Mellon in December as its forex bank and told its investment managers to negotiate more forex trades directly. Pension funds have learned through widespread litigation and media reports that standing-instruction transactions are generally less favorable than directly negotiated trades.
"The commonalities reside on the basic premise that these banks used wide discretion in how they executed FX trades in their favor, and in the appetite of attorney generals and investment funds to redress perceived wrongs," said Javier Paz, an Aite Group analyst who specializes in forex matters. (Reporting By Tim McLaughlin. Editing by Alwyn Scott and M.D. Golan)
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