International Union of Operating Engineers, Stationary
Engineers Local 39 Pension Trust Fund v. Bank of New York Mellon Corp., 2012 WL
476526 (N.D. Cal.)
The plaintiff is an employee benefit plan providing retirement
and survivor benefits to approximately 17,000 members. Defendants provided
custodial services on the Trust Fund’s behalf, which meant that it was a
fiduciary whose responsibilities included delivering and accepting traded
securities and collecting principal, interest, and dividend payments on securities.
Over the last decade, the Trust Fund increasingly turned to overseas
investments, which are bought and sold in foreign currencies. Thus, the Trust Fund had to buy and sell
those currencies, and BNY undertook the necessary foreign exchange transactions
to facilitate the Trust Fund’s purchases of foreign securities and the
resulting repatriation of interest and dividends.
You can guess what happens next, right? I mean, this is a bank we’re talking about. The Trust Fund used standing instructions to
have BNY convert the necessary currency when the Trust Fund bought foreign
securities or received interest. The
Trust Fund paid a flat annual fee for this, and could opt out of any particular
trade by telling BNY that it wanted to negotiate with defendants’ traders
directly. BNY advertised that such
standing instructions services were “free of charge,” aside from the flat fee,
and that the transactions were done under “best execution standards” to
“maximize the proceeds of each trade.”
The contract between the parties also guaranteed that the terms wouldn’t
be less favorable to the Trust Fund than terms offered by BNY to unrelated
parties in comparable arms’ length transactions, and specified methods for
determining the rates for foreign exchange transactions.
The Trust Fund got monthly reports that summarized the
transactions, but didn’t provide the time of trade execution, making it
impossible to know the exact rate at which BNY traded.
The Trust Fund alleged a scheme dating back at least ten
years. Upon receiving a request for a
purchase or sale of a foreign security, BNY would execute a trade at the
exchange rate available close to the time of the request. “They would then watch the market fluctuation
on FX rates related to the transaction over the course of the day and charge
plaintiff a rate less favorable to plaintiff than the one at which defendants
actually traded. Defendants would then keep the difference between the true
cost of the trade and the fictitious FX rate defendants claimed to have paid
and charged plaintiff.”
Through careful recordkeeping, BNY was allegedly able to
conceal this by reporting false rates with hidden markups, until whistleblowers
exposed the scheme in 2011. Moreover,
not all standing instructions clients were treated identically; some could opt
out and negotiate their prices every afternoon.
“Similarly, according to a pending action by the New York Attorney
General's office, defendants reached secret agreements with at least 62 favored
clients to set a pre-negotiated fixed markup, called ‘benchmark pricing,’ on
all standing instructions trades rather than the larger markups made on
plaintiff's trades. Some clients therefore received better standing instructions
terms than plaintiff.”
The Trust Fund sued as a putative class plaintiff for all
similarly situated employee benefit plans, alleging breach of contract and
violations of California and New York false advertising/unfair practices laws. The court found that the Trust Fund
sufficiently pled breach of contract and breach of the implied covenant of good
faith and fair dealing.
The court also held that the Trust Fund stated a claim under
California’s UCL. Unfair competition is
assessed by asking (1) whether the conduct is tethered to a specific statutory
provision; (2) how the utility of the conduct weighs against the gravity of the
alleged victim's harm; and (3) whether there are possible countervailing
benefits to consumers or competition. The court found unfairness under all
three factors. First, the requirement
that trades not be less favorable to the plan than to others in arms’ length
transactions was tethered to a relevant ERISA provision. Second, “the harm to plaintiff and other
class members of losing potentially millions of dollars in revenues was not
outweighed by the financial gain accomplished by defendants.” Third, there were
apparently no countervailing benefits to the consumer or to competition. BNY argued that the putative class members
received the benefit of convenience—they didn’t have to make trades themselves—yet
“the extreme financial cost of doing so, along with the loss of trust between
defendants and their clients, do not show defendants' conduct to be beneficial.” (In other words, couldn’t they have received
that benefit without getting cheated?)
BNY argued that its conduct wasn’t unfair because no
reasonable consumer would have thought that defendants had agreed to provide
rates for standing instructions trades that were comparable to trade-by-trade
negotiated transactions, and because the Trust Fund could have opted out of the
standing instructions option at any time. But the Trust Fund sufficiently
alleged misrepresentation of the rates at which defendants were transacting on clients'
behalf. The Trust Fund would have had “no
reason to believe—until whistleblowers came forward—that they were getting a
deal far worse than was being reported.”
The California FAL claims (which require claims that are
likely to mislead reasonable consumers) also survived, for similar reasons. BNY allegedly didn’t provide “free of charge”
trading or abide by “best execution standards.”
BNY argued that pension funds were less likely to be misled and that the
reasonable consumer test shouldn’t apply, but the court found no authority for
applying a “reasonable pension fund” standard, and anyway that’s for the trier
of fact.
NY’s GBL Sec. 349 prohibits consumer-directed deceptive acts
or practices that are materially misleading and cause injury. The court found that the Trust Fund sufficiently
alleged a violation. The only serious
argument was whether the services provided were “consumer-oriented,” since the
typical violation of the law involves an individual buying for
personal/household purposes. However, NY’s
highest court has held that Section 349 allows suits by pension funds against a
bank. The court asked whether the bank's
practices had a broader impact on consumers at large and if the pension fund
clients were treated “as any customer entering the bank” as opposed to entering
into a private, unique contract. Here,
the standing instructions contract was “offered to any customer purchasing
custodial services (except for favored clients), and defendants' practice of
using hidden markups to earn profits affected all of these consumers.” Motion to
dismiss denied.
Finally, the court found that the Trust Fund successfully
pled around the statutes of limitations, because the discovery rule tolls them
when an injury is difficult to detect, the defendant is in a far superior
position to understand it, or the defendant has reason to believe that the
plaintiff remained ignorant of the wrong. The Trust Fund sufficiently pled that the
information it received gave it little reason to suspect that the reported
rates were false.
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