Hidden charges support pension funds's consumer protection claims

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.