After four years of litigation, Bank of New York Mellon (BNY) recently won dismissal of allegations that it violated the California False Claims Act (CFCA). In this multi-district case titled, In re Bank of N.Y. Mellon Corp. FOREX Transactions Litig. (No. 12 MD 2335 [LAK] [S.D.N.Y.]), several California state pension funds (the “Funds”) claimed that BNY, its affiliates and unnamed individuals defrauded them by inflating transactional costs that BNY imposed on foreign currency transactions that it handled for the Funds. They also alleged several common law claims arising from their contracts with BNY.
The Funds alleged that they had custodial agreements with BNY, and BNY held cash and securities on their behalves. BNY’s monthly invoices to the Funds assessed “custodial fees” and “transaction fees,” the latter representing fees assessed, in part, on BNY’s “standing instruction” transactions, whereby BNY automatically converted the Funds’ foreign currency into U.S. dollars (“Foreign Exchange Trading” or “FX Trading”) as it deemed fit. BNY informed the Funds about the executed price for such conversions after the fact and described its service as providing “best execution.” According to the Funds, that term has an industry meaning different than the actual pricing protocols that BNY employed and did not disclose to the Funds. The Funds alleged that BNY’s profit margins significantly exceeded those ordinarily earned from directly negotiated FX Trades. The Funds further alleged that they were given the worst rates instead of the “best execution” rates that they had anticipated from the trades. BNY allegedly assessed transaction fees between $12 and $75 per trade. Notably, although the Funds’ accounts were automatically debited or credited for such trades, they had the opportunity to object to any invoiced transaction.
The qui tam litigation began four years ago in California state court and has had a long procedural road. In 2011, the cases were removed to a federal court in the Northern District of California (N.D. Cal.). BNY then moved to dismiss on the grounds of improper venue and insufficient pleading. The California federal court granted dismissal with leave to re-plead in the proper venue. In 2012, the Judicial Panel on Multidistrict Litigation transferred the cases to the Southern District of New York (SDNY). BNY again moved to dismiss the Funds’ complaint, and the court granted the motion.
The court first considered, and dismissed, the Funds’ claims that BNY violated the CFCA because the monthly transaction statements and custodial invoices that BNY submitted to the Funds constituted false claims for payment or approval. It found that transaction statements could not form the basis for a CFCA claim because they are not “claims” under the CFCA. The court then found that the Funds did not state a CFCA claim based on the custodial invoices either, because they did not “identify a single statement in any of the invoices that arguably was false or even misleading.” Significantly, the court added that: “Given that plaintiffs allege that they received these invoices regularly, it is particularly reasonable to have expected more here.”
The court also considered whether, absent specific allegations that the invoices were fraudulent, the CFCA claim might be sustained on the theory that the original contract between BNY and the Funds was fraudulently induced through the allegedly false “best execution” representations. Here, too, though, the court concluded that the allegations fell short of asserting that BNY made misrepresentations about its standing instructions, which induced the Funds to retain BNY as their custodian. The court observed that: “Nowhere do plaintiffs allege that they or their agents reviewed the web page on which the ‘best execution’ representation was made or even that they or their agents otherwise were aware that defendants had been representing their service as providing best execution.”
Finally, the court rejected the Funds’ claim that BNY’s statements omitted markups on trades. The court found that BNY was under no duty to disclose its markups in this “an arm’s-length transaction.”
The BNY case is another reminder that FCA cases are no exception to the rule that complaints alleging fraud must include detailed allegations of the who, what, when and where describing the fraud. And plaintiffs should heed this court’s cogent observation that such specificity is especially expected in FCA cases alleging repeated or routine misrepresentations.