LEWIS A. KAPLAN, District Judge.
Table of Contents Background...........................................................................443 I. Facts....................................................................443 A. Overview of Standing Instruction Trading.............................444 B. Representations About Standing Instruction Pricing...................444 1. Best Execution...................................................444 2. Other Representations............................................446 C. Pricing Practices....................................................447 D. Effects on Bank......................................................448 II. Procedural History.......................................................449 Discussion...........................................................................450 I. Legal Standard...........................................................450 II. "Affecting" a Financial Institution......................................451 A. Claim Against Nichols................................................451 1. "Victimizing"....................................................451 a. Text.........................................................451 b. Statutory Structure..........................................452 c. Legislative History and Purpose..............................454 2. "Indirect Harm" by a Third Party.................................456 3. Sufficiency of the SAC...........................................457 B. Claim Against BNYM...................................................461 III. Sufficiency of Fraud Allegations.........................................463 A. Basic Principles.....................................................463 B. Representations Relating to Quality of Traditional Standing Instruction Pricing................................................465 1. "Best Execution".................................................465 a. Materially False or Misleading...............................465 b. Intent to Deceive............................................467 c. Intent to Harm...............................................474 2. Generally Reflecting Interbank Rate at Time of Execution.........475 3. Free of Charge and Minimizing Costs..............................476 4. "Best Rate of the Day"...........................................477 C. Netting..............................................................478 D. Same Pricing.........................................................480 1. Non-ERISA Clients................................................481 2. ERISA Clients....................................................481 E. Fraudulent Omissions.................................................482 1. Superior Knowledge...............................................482 2. Heightened Level of Trust........................................483 Conclusion...........................................................................483
The United States brings this civil fraud suit against defendants The Bank of New York Mellon ("BNYM" or the "Bank") and one of its employees, David Nichols. The second amended complaint ("SAC") alleges that defendants engaged in a scheme to defraud the Bank's custodial clients by representing, among other things, that the Bank provided "best execution" when pricing foreign exchange ("FX") trades under its "standing instructions" program. In Southeastern Pennsylvania Transportation Authority v. Bank of New York Mellon Corp. ("SEPTA"),
The government sues under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA").
In particular, this case presents the following question of first impression by any court: whether a federally insured financial institution may be held civilly liable under Section 1833a for allegedly engaging in fraudulent conduct "affecting" that same institution. This question currently is presented in two other cases in this district.
BNYM contends that it cannot be held liable on such a theory, arguing that the affected institution must be the victim of or an innocent bystander to the alleged fraud, not the perpetrator. The Court disagrees. In passing FIRREA, Congress sought to deter fraudulent conduct that might put federally insured deposits at risk. Where, as alleged here, a federally insured financial institution has engaged in fraudulent activity and harmed itself in the process, it is entirely consistent with the text and purposes of the statute to hold the institution liable for its conduct.
Regarding the merits of the fraud allegations, the complaint generally suffices to allege the principal claim here — that defendants fraudulently misrepresented their standing instruction service as providing best execution. As in SEPTA, the complaint plausibly alleges that the Bank priced its trades inconsistent with the industry understanding of the term, rendering defendants' representations at least misleading. While the government here has a burden to plead facts giving rise to a strong inference of fraudulent intent, the complaint does so. It contains allegations that, if proven, would permit the conclusion not only that Bank employees knew their practices were inconsistent with an industry understanding of "best execution," but also took active steps to mislead their clients about how trades were being priced.
This said, while the government adequately pleads a number of other alleged misrepresentations closely related to the notion of best execution, its theories of fraud on some other grounds are insufficient. Accordingly, defendants' motions to dismiss are granted in part and denied in part as detailed below.
The Court briefly provides an overview of BNYM's standing instruction program
BNYM is one of the world's largest custodial banks, holding on behalf of its clients domestic and international financial assets, including currency and securities.
BNYM has provided certain foreign exchange services to these custodial clients in two principal ways.
This case is about how the Bank set its prices for standing instruction trades. As this Court discussed in greater detail in SEPTA, the principal policies and procedures of the standing instructions program provided limited information about BNYM's pricing practices. They noted that the pricing would be no worse than certain prices set forth in a daily schedule each morning and deviate no more than three percent from the relevant interbank rate — the latter guarantee apparently to ensure compliance with ERISA requirements.
The SAC alleges that defendants filled this void through various representations to clients conveying the impression that BNYM in fact was providing its clients the
The most important of these alleged representations was "best execution." "Best execution" allegedly is a term with an "industry definition" and is "commonly understood to mean that the client receives the best available market price at the time that the currency trade is executed."
In particular, the SAC alleges that BNYM's website — to which clients were referred — stated that one of the "benefits" of the service was "`FX execution according to best execution standards.'"
In addition, defendant David Nichols, a managing director and the head of products management at BNYM, drafted a three-paragraph "standard comment" (the "Standard Comment") on best execution that was disseminated to the Bank's clients.
The Standard Comment was provided in responses to requests for proposals ("RFPs"), responses to client inquiries, and was submitted also to a trade magazine.
Other RFP responses contained different language that, the SAC alleges, strengthened the impression that the Bank provided best execution in accordance with the alleged industry definition of the term. In one response, the Bank stated that it "`ensure[d] best execution'" by, among other things, "`actively engag[ing] in making
The SAC alleges that the representations set forth above generally were made by the Bank from 2000 through 2011 and by Nichols from 2004 to 2011.
Separate from these various representations about the quality of standing instruction pricing in the ordinary course, the Bank allegedly made representations about "netting."
The SAC alleges that BNYM's website stated that standing instruction clients benefitted from "`[a]ggregation and netting of trades based on guidelines tailored to clients needs."
Finally, defendants allegedly represented that all standing instructions clients received the same pricing. In particular, the Bank had a policy for its ERISA clients that provided that the "`terms of FX transactions with any [ERISA plan] shall not be less favorable to the [ERISA plan] than the terms offered by BNY to unrelated parties in a comparable arm's
Allegedly contrary to the impression conveyed by the above representations, BNYM priced standing instruction trades as follows. It collected standing trade requests for various currencies throughout the trading day until the early afternoon (around 1:30 p.m. Eastern time).
The SAC alleges that the customer later learned the exchange rate at which its trades occurred.
As to netting, whether the Bank actually netted customer trades allegedly varied depending on which trading desk executed the order. While the New York and Brussels
Finally, the Bank allegedly did not provide the same pricing to all standing instruction clients. Instead, when a client complained about the pricing it had received, when BNYM had reason to believe that the client was likely to scrutinize its pricing more carefully, or when the client was of "`substantial market stature,'" BNYM switched the client to a benchmarking pricing model for standing instruction trades.
The SAC alleges that BNYM's pricing practices permitted it to earn "enormous" spreads on standing instruction trades compared to the "modest" spreads it earned in negotiated transactions.
Over time, and particularly after a lawsuit against State Street Bank alleging similar practices was made public in late 2009, BNYM's clients became more interested in BNYM's pricing practices, and a number complained about the pricing they were receiving.
As clients have learned more about the Bank's practices, the SAC alleges, the Bank has suffered various negative consequences. It asserts that numerous lawsuits have been filed against the Bank in both state
The SAC further alleges that the revelations have affected the Bank's FX business. Some clients have become dissatisfied with BNYM, and some have left it altogether.
The initial complaint in this case was filed in October 2011
The SAC was filed in June 2012.
Defendants move to dismiss,
To survive a Rule 12(b)(6) motion, a plaintiff must plead facts sufficient "to state a claim to relief that is plausible on its face."
Section 1833a provides that "[w]hoever violates any provision of law to which this section is made applicable by subsection (c)" shall be civilly liable in an action for civil penalties brought by the Attorney General. Section 1833a(c) in turn sets forth the applicable violations:
Defendants contend that Nichols cannot be liable under Section 1833a because the SAC fails sufficiently to allege that BNYM was "affect[ed]" as that term should be understood.
Neither contention is persuasive. The SAC sufficiently alleges that BNYM was affected to permit liability as to Nichols.
The Court begins, as it must, with the text.
While the holding of Bouyea was relatively narrow, courts within this district also construing FIRREA Section 961(l) persuasively have extended its reasoning to cases much like this one.
The text of the statute supports the government.
In the absence of textual support, defendants urge this Court to read in a "victimizing" limitation from the structure of Section 1833a. The attempt fails. If anything, the structure of the section further bolsters a broad understanding of the term.
As defendants point out, the violations enumerated in Section 1833a(c) fall into two principal categories: (a) those that apply without any additional limitation (embodied in Section 1833a(c)(1), (3))
Defendants' argument misconstrues the statute. In fact, a number of the violations in category (a) do not require that any financial institution be victimized. For example, violations of 18 U.S.C. §§ 1007, 1014, which proscribe inter alia the making of a false statement with the purpose of influencing an action by various regulators, including the FDIC and the Federal Housing Administration, are predicates to Section 1833a liability yet may occur without victimizing a financial institution. Another, 18 U.S.C. § 1005, makes liable anyone who inter alia makes false entries in financial books with intent to deceive federal regulators, or with intent to defraud any individual or company, including but expressly not limited to the financial institution itself. Thus, if an officer cooks an institution's books in order to deceive the FDIC or other regulators, to get mortgage insurance proceeds for the institution from mortgages guaranteed in part by the FHA, or even just to defraud a customer, civil penalties may be imposed without any need to show that the institution was victimized. Indeed, there is nothing in the text foreclosing the possibility that an institution could participate in and benefit from such a crime. If anything, the violations in category (a) suggest that Congress, in passing Section 1833a, was not necessarily concerned only with harm to financial institutions — let alone only their victimization — as it was with the presence of criminal activity in matters meaningfully involving financial institutions, however that activity may affect them.
The violations in category (b) other than mail and wire fraud — that is, those that apply only when the violation is one "affecting" a federally insured financial institution — are instructive as well.
Even if an example could be constructed in which a false claim against the United States somehow victimized (as opposed to having some collateral effects on) a financial institution, it would be far more natural to read the combination of Section 287 and "affecting" not to be limited only to such narrow circumstances. Rather, Section 287 is a general false claims statute, applying to claims on the United States government in any number of areas. By limiting the applicable false claims to those "affecting a financial institution," Congress appears to have meant to restrict coverage of Section 1833a to those false claims against the government meaningfully involving financial institutions — that is, being in the financial industry.
Indeed, that "affecting" might mean something closer to "involving" is supported by the heading of the subtitle. Section 1833a came from Section 951 of FIRREA, which was the only section of Subtitle E of Title IX of FIRREA. Subtitle E was entitled "Civil Penalties for Violations Involving Financial Institutions."
Finally, defendants argue that the legislative history salvages their construction of "affecting" as "victimizing," contending that it shows that Congress was concerned exclusively with "shield[ing]" institutions from frauds committed at their expense.
FIRREA was passed in direct response to the 1980's savings and loan crisis. According to committee reports, Congress sought to control the "outright fraud and insider abuse" that had pervaded the thrift industry and that it found to have been a significant contributor to the crisis.
The very House report on which defendants considerably rely points out that at least some of the fraud at issue was not due to thrift officers seeking to victimize their banks, but rather to save them without any intent to achieve personal gain:
The committee went on to quote a savings and loan president who discussed the many problems with managers of failed thrifts and noted that "`[i]nstead of attempting to remedy the problems which were so apparent, they spent all of their efforts in proposing intricate schemes to appear to aid in maintaining the equity at a proper level.'"
Thus, Congress was addressing not only frauds by insiders who were trying to harm their employers, but also frauds by insiders seeking to benefit their employers — perhaps through deception of auditors or regulators. In cases of the latter sort, the fraudulent practices cannot be understood to be directed at, or victimizing, the thrifts — after all, the thrifts themselves could have been charged with crimes in those very instances.
In fact, the legislative history shows who Congress truly believed were the victims of the S & L crisis and whom Congress sought to protect through FIRREA: S & L depositors and federal taxpayers put at risk by the thrifts' fraudulent behavior.
The text of FIRREA itself makes this focus on depositors even clearer in this particular context. It sets forth as one of the general purposes of the statute "strengthen[ing] the civil sanctions and criminal penalties for defrauding or otherwise damaging depository institutions and their depositors."
Thus, the legislative history does not support defendants' contentions.
Apparently recognizing the weakness of their "victimizing" formulation, defendants leave open the possibility that "affecting" may encompass indirectly harming an institution, so long as the harm is caused by actions of third parties and not the institution itself.
Courts repeatedly have rejected precisely such a contention in the FIRREA Section 961(l) context. As the Seventh Circuit has recognized, "the mere fact that participation in a scheme is in a bank's best interest does not necessarily mean that it is not exposed to additional risks and is not `affected.'"
Accordingly, accepting defendants' construction would yield absurd results. Consider two cases: (1) a junior bank employee, unbeknownst to the employer, engages in a fraudulent scheme to defraud the bank's customers and thereby increase his own compensation, but when the scheme comes to fruition, customers desert the bank and it fails; and (2) the same scheme occurs with the same results, but in this case the bank helps facilitate the scheme in order to increase its profits. Defendants' interpretation of the statute would suggest that the employee "affected" the institution in the first case but that the employee did not do so in the second, even though the scheme had identical effects on the institution in both.
In short, the Court declines to conclude that an institution cannot be affected by a fraud solely because it participates in it.
Having rejected defendants' two proposed limiting constructions of the "affecting" clause, the Court turns to whether the SAC sufficiently alleges that BNYM was affected by Nichols' alleged fraud.
As the foregoing discussion suggests, there is at least some support for the proposition that BNYM's alleged participation in the fraud, along with its garnering of substantial profits from it, itself is sufficient to allege that BNYM was affected.
The SAC alleges that BNYM was affected negatively in a number of ways. It alleges that the scheme directly has caused BNYM legal expenditures and exposed it to considerable legal exposure through the many cases pending before this Court and others in state court.
These allegations are sufficient. Courts regularly have concluded that a fraud affects an institution by embroiling it in costly litigation, whether because the fraud causes actual losses to the institution through settlements and attorney's fees
Defendants contend that basing effects on litigation costs and exposure would be "illogical" because "[s]urely the commencement of meritless litigation should not trigger FIRREA penalties," and the allegations here are unproven.
The sufficiency of the SAC is supported further by its allegations regarding BNYM's business prospects. It is difficult to fathom how BNYM could not have been affected when the scheme allegedly has led to the departure of a number of clients and to significant reputational harm for the Bank.
In concluding that these alleged negative effects suffice, the Court is mindful that the effects must be "sufficiently direct"
Finally, contrary to defendants' contentions, the allegations of negative effects are not negated by BNYM's allegedly significant profits accumulated during the course of the charged scheme. The negative effects of legal costs, potential liability, and reduced future profit opportunities are of a very different character than the profits BNYM accumulated. Those profits therefore reasonably cannot be understood to cancel out these losses and risks. As Judge Wood observed in reaching the same conclusion in a FIRREA Section 961(l) case, any attempt to compare the costs and benefits in this kind of situation would be "extremely complex and speculative" and "it is doubtful that Congress intended for a court to undertake such a difficult and indefinite exercise."
For the foregoing reasons, the SAC sufficiently alleges that the fraudulent scheme "affected" BNYM, such that Nichols may be held liable under Section 1833a.
The Court turns now to the claim against BNYM. BNYM argues that, to whatever extent the legislative history may support liability for insiders, there is no indication that Congress sought to permit imposition of penalties on the institutions themselves. It contends that the government's reading therefore would "turn[] FIRREA on its head, and would convert a statute designed to shield federally insured financial institutions from fraud by others into a weapon to impose punitive civil fines on federally insured financial institutions."
The distinction that BNYM divines from the legislative history is entirely absent from the text. Section 1833a(a) creates liability for "[w]hoever violates any provision of law to which this section is made applicable by subsection (c)."
BNYM complains that this reading requires the supposedly unnatural construction that BNYM is liable for "affecting itself" and that such a reading of "affecting" is contrary to the term's plain meaning. The Court disagrees. It is perfectly natural to say that one's actions may affect oneself. For example, one might say "John's criminal behavior is affecting his future career prospects" and "John's criminal behavior [thus] is affecting him."
BNYM further argues that the government's reading is an end-run around on 12 U.S.C. § 1818(i), established also by FIRREA, which sets forth a three-tiered penalty structure to be imposed on institutions and their employees by their assigned regulator for various violations and unsafe practices. BNYM contends that the "carefully crafted" structure of Section 1818(i) was meant to be the exclusive authority pursuant to which penalties may be imposed on financial institutions pursuant to FIRREA.
There are several problems with this argument. First, it proves too much — employees of the institutions also are subject to penalties under Section 1818(i), and BNYM cannot credibly argue that employees are not subject to Section 1833a.
Indeed, it is not hard to imagine why Congress would have created an overall regulatory scheme under 1818(i) permitting the assigned regulator to assess penalties against the institution and its employees for general violations and unsafe practices, while providing also in Section 1833a that the Attorney General may obtain civil penalties for criminal activity by anyone. The Attorney General has special expertise in investigating and prosecuting criminal cases that bank regulators may not possess.
Finally, BNYM complains that assessing penalties against a financial institution would defeat the point of FIRREA by weakening the institution and therefore putting federally insured deposits at risk.
In sum, the essential point is this: the statute permits penalties against "whoever" commits a fraud affecting a federally insured financial institution. The purpose of that provision is to deter frauds that might put federally insured deposits at risk. Here, BNYM has been charged with participating in a fraudulent scheme and harming itself in the process. Just as Congress clearly intended to deter bank employees from engaging in fraud that results in harm to these institutions, Congress was entitled to conclude that penalties against financial institutions in cases like this would deter such institutions from similar, harmful, fraudulent conduct. If anything, the urgency may even be greater when the fraud allegedly pervades an institution that the government has backstopped. Both the text and purpose of FIRREA amply encompass the alleged conduct here. Defendants' motion to dismiss on this ground is denied in full.
Defendants next contend that the SAC fails sufficiently to plead claims of wire or mail fraud against either of them. The allegations of fraud may best be divided into four categories: (1) representations about the quality of traditional standing instruction pricing, including best execution, (2) representations about netting, (3) representations about same pricing, and (4) fraudulent omissions.
Sections 1341 and 1343 prohibit the use of mails or wires in furtherance of "any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises."
Our Circuit has suggested that intent to defraud for purposes of the mail and wire fraud statutes comprises two principal parts: (1) intent to deceive and (2) contemplation of actual harm to the victim.
Where a "defendant made misrepresentations to the victim(s) with knowledge that the statements were false," an intent to deceive may be inferred.
But "[m]isrepresentations amounting only to a deceit are insufficient," as such "deceit must be coupled with a contemplated harm to the victim."
On the other hand, "[w]here the false representations are directed to the quality, adequacy, or price of the goods [or services] themselves, the fraudulent intent is apparent because the victim is made to bargain without facts obviously essential in deciding whether to enter the bargain."
In sum, "[i]t is not sufficient that the defendant realizes that the scheme is fraudulent and that it has the capacity to cause harm to its victims."
The first category of representations at issue here is representations going to the quality of traditional standing instruction pricing in the ordinary course. It comprises a number of distinct representations, including (1) best execution, (2) whether the price generally reflected the interbank market at the time of execution, (3) free of charge and minimizing costs, and (4) best rate of the day. The Bank is charged with all of them, and Nichols is charged with all but the representations that the service was free of charge and minimized costs.
The Court discusses these representations in turn. As discussed below, however, the analysis of fraudulent intent overlaps significantly in view of the similarity in the respective impression that each allegedly conveyed.
The SAC adequately alleges that the representation that BNYM provided "best execution" was materially false or misleading.
The SAC alleges that "best execution" is a term of art in the industry meaning that the bank provides to the customer the best price available in the circumstances.
Defendants argue that the Standard Comment drafted by Nichols never said that best execution meant best price, and sought to emphasize the importance of other factors. But it need not have done so in light of the alleged industry understanding of the term. As this Court concluded in SEPTA, to whatever extent these statements "suggest that BNYM viewed its best execution standard as involving many aspects of trade facilitation other than pricing, the language does not expressly forswear the industry understanding of the term."
Having sufficiently alleged that defendants' representations suggested that they were pricing under the industry definition, the SAC further adequately alleges that such representations were materially false or misleading. BNYM argues that it is not plausible that anyone could have believed that BNYM was offering a sophisticated
These arguments miss the point. BNYM may well be correct that even the SAC's definition of best execution did not require it to trade at the interbank rate itself; the Court is skeptical that a price is really "available" in the market if any bank offering that rate to its customers likely would lose on every trade. It may prove correct also that the industry understanding of "best available" price still incorporates certain qualitative factors of execution, such that a bank can offer price spreads larger than others but still be considered as providing best execution. Finally, it may prove correct that there is some disagreement in the industry about what exactly best execution requires. Nevertheless, at this stage, it is at least plausible that BNYM's practices — which allegedly produced spreads ten times that of negotiated transactions — sufficiently exceeded the bounds of any reasonable industry understanding of best execution to make the representation false or, at a minimum, misleading.
The SAC's allegations that BNYM intended to deceive its customers about the nature of its pricing practices through the "best execution" representation are more than sufficient to survive dismissal.
The SAC alleges that key BNYM employees knew that best execution was a term with an industry meaning — indeed, as discussed below, Nichols specifically invoked industry definitions in internal emails when crafting the Standard Comment.
The SAC permits the inference that, in describing the need to "do a little" of "Best Execution," rather than the "friendly business" previously existing, Rodriguez believed that the Bank was not generally providing best execution at that time. The SAC alleges also that BNYM acknowledged that it did not provide best execution to at least one customer; when the New Jersey Department of Treasury allegedly discovered in late 2005 or early 2006 that it was receiving the worst interbank rate each day and confronted the Bank about it, the Bank allegedly "told New Jersey that the Bank does not guarantee
In and of itself, the allegations that key senior officials at the Bank knew about the alleged industry understanding of the term, knew that the Bank was not actually ensuring best execution under that understanding, and yet referred clients to a website that said simply that the service offered "FX execution according to best execution standards" supports a strong inference of intent to deceive. But there is much more here as well.
The very nature of the Bank's pricing practices further supports this inference. The Bank repeatedly has taken the position that it was under no obligation to provide pricing any better than the morning daily schedule price so long as the price was within 3 percent of the relevant interbank rate. Thus, as this Court recognized in SEPTA, "[t]he allegations of the SAC arguably permit the inference that BNYM nevertheless consistently priced the transaction within the daily interbank range — against its immediate economic interest — to give clients the impression that the trades were executed at or near prevailing interbank rates, but that the executions unfortunately occurred at times of day when prices were less favorable."
The Bank allegedly misled other customers as well in responding to similar inquiries. Before allegedly stating that it did not guarantee best execution, the Bank told the New Jersey Department of Treasury that, in pricing standing instruction trades, it "obtained a price for the trade and then took a spread on top of the price."
In each of these cases, the Bank set forth an explanation of how it priced transactions that likely was consistent with the industry definition of best execution, but that allegedly was inconsistent with how BNYM actually priced the trade. Such conduct supports the inference not only that these Bank employees were aware that its customers were under an inaccurate impression about what its pricing practices were, but that these same employees intended to further that erroneous impression through specific allegedly false statements.
The SAC's allegations about the Bank's alleged efforts to "conceal[]" its pricing practices also provide some, if more limited, support for the inference of intent to deceive.
The SAC contains also various allegations permitting inferences of consciousness of guilt.
In contending that the SAC does not sufficiently allege fraudulent intent, BNYM does little to engage with the numerous allegations of conscious misbehavior and recklessness set forth above. Rather, BNYM contends only that alleging corporate scienter requires alleging that a particular employee had the requisite intent, that the only employee alleged to have had such intent was Nichols, and that the SAC fails to allege such intent as to Nichols. As will be clear below, the Court disagrees that the SAC is insufficient in alleging a strong inference of fraudulent intent as to Nichols, making BNYM's argument entirely beside the point. More broadly, however, the allegations set forth above hardly involve "piecing together scraps of innocent knowledge held by various corporate officials" in the way that has given courts pause about theories of collective knowledge to allege corporate scienter.
Turning to the allegations against Nichols specifically, the Court concludes that the SAC is sufficient. It alleges that Nichols was aware of how the industry allegedly defined best execution. Indeed, he specifically invokes and quotes the SEC definition as "trading `in such a manner that the client's total costs or proceeds in each transaction is the most favorable under the circumstances'" when circulating the Standard Comment in a May 2005 internal email.
In urging the Court to reach the opposite conclusion, Nichols' counsel at oral argument pointed to various statements that Nichols made — separate and apart from the Standard Comment — that purportedly show that Nichols was actively combating the impression that best execution meant best available price.
First, when T. Rowe Price asked for "`periodic reports to evidence that you [BNYM] have provided us with best execution,'" the request was forwarded to Nichols. Nichols provided the Standard Comment as "our statement on the subject," which a Bank employee passed on to the client.
Second, the SAC alleges that the Standard Comment was provided to U.S. Bank in March 2009, without alleging that any other statements were made as well.
These episodes do not support Nichols' contentions that he cured any misleading impression created or reinforced by his Standard Comment. In fact, they support the government's position. While other inferences perhaps also may be possible from these documents and allegations, that T. Rowe Price requested "periodic reports to evidence that you have provided us with best execution" and that Nichols described U.S. Bank as "fishing for a silver bullet" permits the inference at this stage that Nichols was aware that these clients were under a mistaken impression about what BNYM meant when it said that it was providing best execution, but actively chose not to dispel that view.
Indeed, the strong inference of intent to deceive arising from Nichols' conduct with respect to U.S. Bank and T. Rowe Price is further reinforced by how differently he acted with respect to a third, unnamed client in January 2004. In that case, Bank employees apparently drafted — and Nichols approved — a response to the question,
The response then discussed the standing instruction program. It noted, with markedly greater candor than allegedly was provided to other clients, that "there has been some uncertainty ... about the true cost of foreign exchange standing instructions" and that the Bank "always strive[s] to ensure our clients know how much any service costs."
Finally, Nichols contends that his active pushing of "post-trade analysis" in both the Standard Comment and other communications negates an intent to deceive. The post-trade analysis Nichols apparently offered to provide would have shown the list of prices at which the client's trades were completed along with the high and low prices of that day as reported by Reuters, flagging any prices that fell outside the daily range.
The government adequately alleges that the defendants contemplated actual harm to their customers that flowed from the alleged deceit.
BNYM provided standing instruction trading as a service to its custodial clients. Whether that service gave customers the best available market price at the time of execution or some other, less favorable price, is quite plainly a question that goes to the "nature or quality of the service" the Bank was providing.
Defendants' contentions to the contrary would have more force if the facts were somewhat different. For example, suppose BNYM had engaged a customer in a directly negotiated transaction and quoted a price of, say, $1.31 per euro. Suppose further that the Bank represented also that this was the "best available price" at that time — or even that it was making no profit at that price — while in fact the Bank expected to make or made a significant profit. If the customer agreed to the price, the essence of the bargain would be the exchange of currencies at the agreed-upon price of $1.31 per euro and there would be no showing of an intent to harm in the absence of other circumstances.
One section of Nichols' Standard Comment on best execution stated:
The SAC alleges that the italicized statement was fraudulent in light of the Bank's actual pricing practice because it suggested that the customer "would be receiving the best available rate at the time the trade is executed," when that was not actually the case.
The SAC adequately alleges that the statement was misleading by conveying the impression that the pricing at least in some sense was based on the interbank market prevailing at the time at which the trade was executed, when in fact, the time that the trade was executed was irrelevant.
The SAC adequately alleges also that defendants intended to deceive in making this statement. It is more than plausible that defendants knew that the reference was misleading, as Nichols and other Bank employees were well aware that a number of the Bank's customers were particularly interested in time stamps precisely so that they could verify that, indeed, the rates "generally reflect[ed] the interbank market at the time the trade is executed."
With regard to contemplation of harm, like "best execution," whether the Bank's pricing of the trade generally reflected the interbank market at the time the trade was executed plainly went to the nature or quality of the service provided so as to give rise to the requisite intent to defraud.
The SAC alleges that BNYM's website until late 2009 stated, "Operationally simple, free of charge, and integrated with the client's activity on the various securities markets, FX standing instruction is designed to help clients minimize risks and costs related to the foreign exchange and concentrate on their core business."
The Court is not persuaded that the reference to minimizing costs, standing alone, was fraudulent. Particularly in light of the statements "[o]perationally simple" and "concentrat[ing] on their core business," this reference on its face spoke principally to the ways in which standing instruction trading had the potential to reduce costs by reducing the administrative overhead entailed when a client was obliged to negotiate directly. To whatever extent this reference could have been misleading, the SAC fails to allege facts giving rise to a strong inference that the Bank intended to deceive its clients when it said that the service was designed to help clients minimize their costs.
The reference to "free of charge" is a separate issue because, on its face, it speaks only to the costs or charges associated directly with the standing instruction service itself. Defendants contend that the statement was neither false nor misleading because "free of charge" plainly meant that there was no supplemental per-transaction fee to the customer. To support this contention, defendants cite a number of cases that suggest that a currency exchange spread is not a fee, charge, or commission for purposes of certain California disclosure statutes.
The SAC at least plausibly alleges that calling the service "free of charge" was misleading. While the Court is sympathetic to defendants' contentions that the Bank's customers must have known that some spread would be charged, the contention presents factual issues not properly decidable at this stage. Whatever the implausibility of believing that the Bank actually would provide the currency at the interbank rate itself, it is at least plausible that this statement conveyed the impression that the Bank would offer the currency at a price no worse than the bid/offer spread that it might have had to pay to acquire the currency in the first place or no more than what the customer would have obtained in a negotiated transaction executed at the same time.
To the extent that such an impression would have been essentially equivalent to the impression allegedly conveyed by the reference to "best execution," the SAC adequately alleges a strong inference of intent to deceive for the same reasons discussed above. Indeed, the Bank's alleged attempts to mislead clients who complained about poor pricing may be viewed as deceiving them about "free of charge" just as much as about "best execution." Moreover, the SAC alleges that Bank employees often discussed internally the spreads earned in standing instruction trades as a "fee" or "charge."
Finally, like best execution, whether the service was free of charge goes directly to the quality of the pricing that the customers reasonably anticipated. Hence, the sufficient allegations of intent to deceive supports an inference of intent to defraud.
Defendants allegedly stated the following in RFP responses and a question and answer document designed to guide Bank employees' response to client inquiries:
The statement appears only to have touted the benefits that the Bank claimed to provide through the aggregation of small trades and potentially suggested that all clients receive the same pricing. Perhaps these suggestions are problematic; certainly there is tension between this statement and the Standard Comment's suggestion that very small trades received worse pricing. The SAC does not allege that this statement was misleading on either of these grounds, however.
The Court concludes that the SAC fails plausibly to allege that this statement was misleading on the grounds it advances.
The SAC alleges that the Bank (but not Nichols) fraudulently stated on some occasions that it offered aggregation and netting of trades, when in fact only the London and Brussels trading desks, but not the Pittsburgh trading desk, did so. In particular, the SAC alleges that the Bank's website stated that clients benefitted from "[a]ggregation and netting based on guidelines tailored to client needs,"
The Bank's principal contention is that these representations show only that netting was available and that the service, if provided, would have been "based on guidelines tailored to client needs" — i.e., that customers were invited to discuss the possibility of arrangements under which netting would have occurred. But while this argument may persuade a trier of fact, it for present purposes does not defeat the plausible allegation that these representations
Nevertheless, that does not get the government where it wants to go as to most of these alleged misrepresentations. The problem for the government is in alleging a strong inference of an intent to deceive. Whether the trades always were netted is quite a different issue than whether the trades were priced under the SAC's alleged definition of best execution, and so the allegations supporting an intent to deceive in the latter context do not assist the government here. The SAC supports the inference that Bank employees were aware that there was a discrepancy between the practices of the Pittsburgh trading desk and those of London and Brussels. At the same time, with the exception of the alleged representation to FRSTF, all of the representations regarding netting reasonably could have been understood to mean that netting was a service the Bank offered, without necessarily guaranteeing that netting always would occur.
Further undermining an inference of fraudulent intent with respect to these statements is the absence of a plausible allegation that the Bank's netting practices were hidden from customers. The SAC alleges that the customers were told the exchange rates for their trades,
The same cannot be said, however, with respect to the representation made to FRSTF. The SAC permits the inference that FRSTF's trades at least in part were routed through the Pittsburgh trading desk, that the Bank did not provide netting
In sum, the SAC's allegations regarding netting are insufficient except with respect to the representation made to FRSTF.
The SAC alleges that defendants made representations to the effect that all standing instruction clients received the same pricing. In particular, for clients that were ERISA plans, the Bank of New York (predecessor to BNYM) had a policy that "`terms of FX transactions with any [ERISA plan] shall not be less favorable to the [ERISA plan] than the terms offered by BNY to unrelated parties in a comparable arm's length FX transaction.'"
As noted above, this policy was identical to a statutory requirement necessary to permit transactions between the Bank and ERISA plans.
The Court first addresses these representations to the extent that they were directed to clients that were not ERISA plans or investment managers of such plans. Defendants argue that there was no false statement in the above representations because benchmarking clients were not considered standing instruction clients and benchmarking transactions were not "comparable" to standing instruction transactions. The contention is unpersuasive. In fact, the SAC alleges that the Bank specifically discussed internally benchmarked transactions as part of standing instructions.
The problem for the government is intent to harm. Whether a client receives the same price as another does not generally go to the nature and quality of the services provided to it; "[t]he mail and wire fraud statutes were not meant to protect consumers against the irritation of learning that others may have gotten a better deal."
The government has a different problem as to ERISA clients. None of the specific clients that the government alleges received any of these representations is alleged to have been an ERISA plan, or an investment manager of an ERISA plan. The SAC alleges that the Bank had a "policy" that the terms provided to ERISA plans should not be less favorable than terms offered to unrelated parties in a comparable transaction. But it does not allege that this policy was disseminated to ERISA clients. Nor does it allege any particular ERISA client receiving such a representation. It alleges only that the statement set forth in this policy was put in "welcome" packages to certain clients who are not alleged to have been ERISA plans.
The SAC as it currently stands fails to satisfy Rule 9(b) with regard to this allegation of misrepresentations made to ERISA clients. While courts have held that in
Finally, the SAC alleges that defendants are liable for fraudulent omissions in that they did not disclose their pricing practices or profits to their customers despite an alleged legal duty to do so.
The government first relies on a New York law principle that, even in the absence of a fiduciary relationship, a party may have a duty to disclose when it "possesses superior knowledge, not readily available to the other, and knows that the other party is operating under a mistaken perception of material fact."
Assuming arguendo that fraudulently failing to abide by this common law duty to disclose could give rise to liability for mail fraud, and further assuming that the SAC adequately alleges that defendants knew that the customers were operating under a mistaken impression, the SAC fails to allege any customs of the trade or other objective circumstances permitting the conclusion that the Bank's customers reasonably would have expected disclosure of the Bank's pricing practices, profits, or any other information so as to have rendered the transactions inherently unfair. As this Court recognized in SEPTA, commercial merchants generally are under no obligation to disclose their underlying
The government contends in the alternative that a duty to disclose arose from representations defendants made that "signif[ied] a heightened level of trust."
Here, the government relies only on defendants' statement in the Standard Comment, "`Understanding the fiduciary role of the fund manager, it is our goal to provide best execution for all foreign exchange executed in support of our clients' transactions.'"
Finally, the government notes in passing that the Bank did have fiduciary relationships with some of its custodial clients. But as this Court concluded in SEPTA, such a relationship is not necessarily sufficient to have created a duty on the part of the Bank to have disclosed information about its standing instruction pricing.
For the foregoing reasons, defendants' motions to dismiss Counts One and Two of the SAC [DI 37; DI 40] are granted to the extent that so much of that pleading as premises claims of mail and wire fraud on fraudulent omissions or on alleged representations as to "minimiz[ing] costs," "best rate of the day," same pricing, or netting (except with regard to the representation to FRSTF) are dismissed. The motions are denied in all other respects.
Certain representations were altered in late 2009, after a lawsuit was unsealed against State Street Bank. In particular, the Bank removed the reference to standing instruction being "free of charge" from its website, and added a further statement about best execution there:
Id. ¶¶ 59, 72.
In addition to Section 1833a and statutes of limitation provisions, the concept arises in the context of criminal forfeiture, see 18 U.S.C. § 982(a)(2)(A), and certain sentencing guideline enhancements, see Johnson, 130 F.3d at 1354.
Notwithstanding the general rule of the last antecedent, it is readily apparent that "affecting a federally insured financial institution" modifies each of the violations in Section 1833a(c)(2). Otherwise Section 1833a could be applied to any false statement made within federal jurisdiction under 18 U.S.C. § 1001, even those having nothing to do with the financial industry. See Am. Int'l Group, Inc. v. Bank of America, 712 F.3d 775, 781 (2d Cir.2013) (noting that where final element of list is not separated by comma, modifier ordinarily applies only to last antecedent, but only "where no contrary intention appears" (citing Barnhart v. Thomas, 540 U.S. 20, 26, 124 S.Ct. 376, 157 L.Ed.2d 333 (2003)) (emphasis and internal quotation marks omitted)).
That these other provisions were introduced shortly after FIRREA's passage does not alter this strong presumption.
Similarly, it is not clear how a false statement made within federal jurisdiction, see 18 U.S.C. § 1001, could victimize a federally insured financial institution.
The committee quoted also an S & L commissioner who said,
"`We got a lot of new entrants, and they like to grow fast; and rapid growth is the cause of one of the worst ailments in a savings and loan business. If you have got a lot of money, high-cost money pushing you and you have to make profits, you have to put it out awful fast; and some of these people had big egos, and some of them got their contributing property for capital [often leveraged 33 to 1 with overvalued appraisals].'" Id. (alterations provided by House report).
The Court disagrees. The colloquy Wells Fargo cites cannot explain why Congress chose the word "affecting," as there is no indication that this term was before any of those individuals at that time. Indeed, if Congress had wanted to limit the scope of mail and wire fraud to bank fraud, then it could have borrowed language from the bank fraud statute itself. See 18 U.S.C. § 1344. Instead, it chose a much broader word.
Finally, while the legislative history does not necessarily show an indication that Congress was concerned with frauds that only benefitted financial institutions, this interpretation would understand Congress' choice of the broad word "affecting" to reflect a conclusion that, in the interest of taxpayers and depositors, fraud simply has no business being around the financial services industry altogether, due to its inherent risks and dangers. See Serpico, 320 F.3d at 694 (discussing purpose of FIRREA Section 961(l) as "deterring would-be criminals from including financial institutions in their schemes").
While the First Circuit has found insufficient evidence after trial showing only that the fraud "arous[ed] the[] possibilities" of an institution losing a client and tarnishing its reputation, the SAC here plausibly alleges that these harms indeed have taken place. United States v. Agne, 214 F.3d 47, 53 (1st Cir.2000).
In Bouyea, the Second Circuit quoted in dicta from a Third Circuit case which suggested that the effect might be "`unreasonably remote'" in a case where "`the fraud was directed against a customer of the depository institution which was then prejudiced in its dealings with the institution.'" 152 F.3d at 195 (quoting United States v. Pellulo, 964 F.2d at 193). In both Bouyea and Pelullo, however, the defendant was not an employee of the bank, and the hypothetical should be read in such a context. That is much different from this case.
Moreover, the government alleges that the Bank made other statements closely pairing "best execution" with the notion of "best rates." In particular, the SAC alleges that RFP responses and a 2005 internal question and answer document designed to guide employees in responding to client inquiries about best execution stated as follows: "`The Bank of New York ensures best execution on foreign exchange transactions through the following mechanisms: As a major market participant, the Bank is actively engaged in making markets and taking position[s] in numerous currencies so that we can provide the best rates for our clients.'" SAC ¶ 43 (emphasis added by SAC). The proximity of "best execution" and "best rates" reinforces the plausibility of the government's contention that the Bank conveyed a materially false or misleading impression about best execution.
To be sure, the Bank could have priced its trades in the way it allegedly did without necessarily harboring intent to deceive. The choice between permissible inferences cannot be made at this stage, however.
While price discrimination is undoubtedly a legitimate business practice, and nonculpable inferences may be drawn from these particular incidents, the allegations may be read also to support the inference that the Bank intended to deceive by ensuring that customers did not learn that the Bank was not providing best execution.
The SAC permits the inference that, even if Nichols knew that there was doubt about what best execution meant, he knew also that customers would not have understood it to encompass BNYM's practices.
