Enforcing Corporate Responsibility when Banks Undertake Questionable Foreign Exchange and Currency Transactions.

Private whistleblower litigation and litigation by the state officials have been brought against the Bank of New York Mellon in courts throughout the United States including New York, Virginia, California, Florida, and Massachusetts.  Just this week the federal government (U.S. Department of Justice) also filed suit for $2bn for fraud in New York.
Generally these suits allege that the bank breached its fiduciary duty and defrauded state pension funds. In particular, they allege the bank overcharged state pension funds when it conducted foreign currency transactions on their behalf. These case further contend this cost the pension funds and state employees millions of dollars. 
Federal securities regulators (SEC) have also began to look at this situation.
This is clearly a situation where it is good public policy to utilize litigation and administrative action to enforce corporate responsibility when a bank conducts questionable foreign financial and exchange transactions on behalf of a client. And it is the bank that profits. It is good for corporate governance, state pension funds, and for state employees.
These cases argue that the bank intentionally charged state pension funds different rates for converting dollars to foreign currencies and converting foreign currencies to dollars. That the bank reported inaccurate data to its clients  to mislead them and pocketed the differences.  The bank argued that it owed no duty to its clients to disclose let alone to do anything any differently
Public pension funds have doubled their international transactions in the past 15 years. This is a huge problem that has only recently become apparent.
Some of the nation’s largest investment firms have also claimed that they have been overcharged in their foreign-currency transactions. For example, Black Rock, Inc., the world’s largest fund manager, identified questionable pricing issues with the Bank of New York’s buying or selling currency in the foreign-exchange market. It claims the bank exchanged currency at prices favorable to the bank under “standard instructions” rather than at the most beneficial prices for its customer, Black Rock, Inc.
To me, if a national bank is trying to systematically profit improperly at the expense of  investment banks, state pension funds, and state employees it should be called to answer in the courts and federal agencies. It is this type of financial self-dealing that was a significant cause of the recent financial crisis. Enforcing good corporate responsibility is good public policy via litigation, especially in tough times. 

About Stuart Malawer

Distinguished Service Professor of Law & International Trade at George Mason University (Schar School of Public Policy).
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