The Wall Street Journal BUSINESS December 28, 2011
Internal BNY Mellon Documents Show Panic
By Jean Eaglesham and Michael Siconolfi
An informant in a state fraud case against Bank of New York Mellon Corp. has provided prosecutors a rare inside peek into how the bank allegedly scrambled to contain the fallout from a fast-growing government investigation, according to hundreds of pages of confidential documents.
As investigators sought to determine whether the bank overcharged clients to execute their currency trades, a senior BNY Mellon executive nicknamed "Rambo" urged traders not to tell clients how much money they made on trading, according to the informant. Bank officials worried clients would switch to negotiating their own foreign-exchange trades, where the bank's profit margin was far lower, an internal bank memo states.
The bank also altered its website, changing the wording of its trading practices. And when a veteran bank official heard about the government investigation, she said: "It's over, it's all over," according to the informant.
The documents, which include company materials, emails and observations, were submitted to Florida prosecutors by lawyers for whistleblower Grant Wilson and obtained by The Wall Street Journal in an open-records request.
Mr. Wilson operated as a government informant for two years while working as a currency trader at BNY Mellon, giving him an extraordinary view of what was happening inside the bank as the investigation unfolded. The extensive documentation, including his descriptions of how the bank processed trades that allegedly resulted in client overcharges, could increase pressure on BNY Mellon as it battles a widening law-enforcement probe.
Five states, including Florida, and the Manhattan U.S. attorney have filed civil lawsuits over the past several months against BNY Mellon, seeking a total of more than $2 billion in damages. The suits allege the bank defrauded pension funds and other clients by systematically overcharging them on currency transactions.
BNY Mellon denies any wrongdoing and is fighting the suits. A bank spokesman said, "A handful of purported statements cherry-picked from millions of documents gathered over a decade, do not reflect the way we do business or the value we provide our clients."
Mr. Wilson declined to comment. His lawyer, Michael A. Lesser of Thornton & Naumes LLP in Boston, declined to comment on the documents, saying the matter is in "active litigation."
Mr. Wilson, 53 years old, is part of a whistleblower group that can seek a share of as much as 25% of any recovery the states obtain in many of the BNY Mellon cases.
He is taking something of a financial gamble. When Mr. Wilson left BNY Mellon in March?after more than a decade working as a trader there?he walked away from deferred bonuses totaling roughly $5 million, according to a person familiar with the matter.
Mr. Wilson in the documents provides intimate snapshots of his colleagues, including details about their families, personal problems and financial standing. The information could be used by prosecutors to help determine who could be witnesses in the case against BNY Mellon ?and who could be hostile. Mr. Wilson cited one trader whom he described as "not a happy camper" who "hates the bank as it has not appreciated her vast talent over the years."
Another was valued by managers as a risk taker who "brings guts to the table," Mr. Wilson says in the documents. A colleague deemed by Mr. Wilson as less-talented "spends all his income on exotic fishing trips," he says.
At issue in the suits filed against BNY Mellon is its "standing- instruction" service. That is when pension funds and other clients allow the bank unilaterally to handle their foreign-exchange, or FX, transactions. Clients could instead negotiate their own foreign- exchange trades, but that would require staff and technology.
In the documents, Mr. Wilson described how a "transaction desk" collected currency trades for BNY Mellon's "standing-instruction" clients and then later in the day set the price at which the bank would record those transactions. The prices often were at or near the day's least-favorable exchange rates, state attorneys general and prosecutors allege, with the bank profiting from the difference.
Mr. Wilson describes the pressure inside BNY Mellon after California prosecutors accused rival State Street Corp. in an October 2009 civil suit of overcharging customers in currency trading. State Street denies wrongdoing and is fighting the currency-trading litigation.
Soon after news of the State Street suit, BNY Mellon changed its description of its standing-instruction service, according to copies of pages from the bank's website submitted by the whistleblower. The bank had called the service "free of charge" and designed to help clients "minimize risks and costs."
By November 2009, the "free of charge" wording had disappeared; instead, the bank described its service as a "complete FX solution."
BNY Mellon said in court filings that it routinely updates its marketing materials and the "free of charge" language referred to the fact there was no transaction fee for the currency trades.
Richard Mahoney, former chief of BNY Mellon's global markets division, told an employee meeting in early 2010 that the company had by then received 16 subpoenas, according to Mr. Wilson.
Mr. Mahoney?who the whistleblower said was nicknamed "Rambo" by co- workers for his military background and propensity "to rant and rave"? told staff "we do not have to tell anyone how much money we make on our dealings," according to the informant. Mr. Mahoney, who retired from BNY Mellon earlier this year, couldn't be reached for comment.
The whistleblower also told prosecutors how one of his colleagues in Pittsburgh, Susan Pfister, allegedly reacted when she learned in early
2010 that BNY Mellon, as well as State Street, was being investigated for its currency-trading practices. She said: "It's over, it's all over," according to Mr. Wilson, allegedly reflecting concerns within BNY Mellon that big profits the bank had long generated from standing- instruction currency trading were going to disappear.Ms. Pfister's alleged comment wasn't included in the civil suit filed by the Florida state attorney general in August, which alleges that BNY Mellon overcharged Florida state pension funds in currency trading.
Ms. Pfister declined to comment through a spokesman for BNY Mellon.
An internal BNY Mellon memo in October 2009 provided by Mr. Wilson said some clients were shifting away from the standing-instruction service to a "negotiated" model?agreeing on the exchange rate for each trade?where the bank's profit margin was lower "by a factor of 10-20 times."
"Once this is done they will never return to their previous model," according to the confidential memo.
The BNY Mellon spokesman said: "We are confident that we provide our clients and their investment managers with valuable foreign-exchange services at competitive prices and the information needed to make informed trading decisions."
After reports surfaced that BNY Mellon was under investigation, executives were torn over how to deal with inquiries from customers demanding to know if they had been overcharged, Mr. Wilson told prosecutors in May 2010. He told prosecutors that Mr. Mahoney "wants to tell them to 'go pound sand,' " but another executive who was "afraid of upsetting custody clients" disagreed.
The documents reveal that at least one other former BNY Mellon employee has offered to help prosecutors build their case against the bank. The salesperson told the Florida attorney general in a letter earlier this year that he could describe how he had been "trained in committing fraud using various strategies."
A spokeswoman for the Florida attorney general declined to comment.
Mr. Wilson faced pressure operating for two years inside BNY Mellon as a secret whistleblower, where he collected internal bank documents and recounted to the government what colleagues said, according to a person familiar with the matter. As news surfaced that an informant was assisting the government in the currency investigation, the bank's foreign-exchange traders grew concerned about a leaker, according to a person familiar with the matter.
On the trading desk, in downtown Pittsburgh, they tried to guess the identity of the whistleblower, asking each other, "Is it you?" this person says.
Mr. Wilson "is concerned about the security of his identity, as he continues to work at the bank," according to a March 3, 2010, letter from his lawyer, Mr. Lesser, to the Florida attorney general's office. "Things are reaching a fever pitch in the office."