LOUISIANA MUNICIPAL POLICE EMPLOYEES' RETIREMENT SYSTEM, individually and on behalf of all others similarly situated, Plaintiff,
JPMORGAN CHASE & CO. and JPMORGAN CHASE BANK, N.A., Defendants.
John C. Browne, Stefanie J. Sundel, Bernstein Litowitz Berger & Grossmann LLP, New York, NY, Joseph H. Meltzer, Sharan Nirmul, Kessler Topaz Meltzer & Check LLP, Radnor, PA, for Plaintiff.
Susan L. Saltzstein, Marco E. Schnabl, Jeffrey S. Geier, Skadden, Arps, Slate, Meagher & Flom LLP, New York, NY, for Defendants.
OPINION & ORDER
DENISE COTE, District Judge.
Plaintiff Louisiana Municipal Police Employees' Retirement System ("LAMPERS") brings suit individually and on behalf of all others similarly situated against JPMorgan Chase & Co. ("JPM") and JPMorgan Chase Bank, N.A. (the "Bank") (collectively "JPMorgan" or "defendants"), for charging undisclosed mark-ups on foreign exchange transactions that JPMorgan executed for custodial clients. This Opinion grants the defendants' motion to dismiss.
The following facts are taken from the Consolidated Amended Class Action Complaint ("Amended Complaint") and documents integral to it. JPM owns and operates the third-largest custodian bank in the world. The Bank is a subsidiary of JPM and provides custodial banking services to institutional investors. LAMPERS - one such institutional investor - is a pension fund and retirement system that provides retirement benefits to full-time municipal police officers and employees in the State of Louisiana. Since 2005, LAMPERS has been a custodial client of the Bank. It uses the Bank's custodial services for multicurrency trading and settlements, accounting, portfolio servicing and reporting, and income collection.
Custodial clients of the Bank, including LAMPERS, often invest in multiple securities of foreign issuers and occasionally engage in direct currency trading as well. As a result of these activities, custodial clients regularly need to convert U.S. Dollars into foreign currencies, or foreign currencies into U.S. Dollars. This conversion is accomplished through a Foreign Exchange or "FX" transaction. In an FX transaction one currency is bought or sold in exchange for another currency at a particular rate that is available in the currency market. The Bank offers FX services to its custodial clients and regularly executes FX transactions at its customers' direction. At its core, the present action is based on the allegation that the Bank executed certain FX transactions at one rate, but charged the custodial clients a different rate, resulting in profit for the Bank, and that the Bank failed to disclose this practice to its custodial clients.
The agreement between LAMPERS and the Bank regarding the Bank's provision of custodial services is embodied in a Global Custody Agreement ("Custody Agreement"), which the parties executed on July 28, 2005. The Custody Agreement "sets out the terms governing custodial, settlement and certain other associated services offered by [the] Bank to Customer" and provides that the "[B]ank will be responsible for the performance of only those Securities custody duties that are set forth in this Agreement." In the Custody Agreement, LAMPERS acknowledged that the "Bank is not providing any legal, tax or investment advice in connection with the services hereunder."
Section 1.2 of the Custody Agreement defines certain terms used in the agreement. The words "custodial" and "services" are not defined.
Section 2 of the Custody Agreement is entitled "What Bank is Required to Do." This section, which includes fifteen subsections, delineates a number of the Bank's obligations under the Custody Agreement. For instance, section 2.1 states that the Bank "will establish and maintain" both a Securities Account - to hold the customer's financial assets - and a Cash Account - to hold the customer's cash. Section 2 also requires the Bank to segregate the client's assets, to use reasonable care in settling trades, to make certain book entries, to notify the client of certain events, to forward certain proxy material, to allow auditing, and to hold assets generally in the country in which their principal trading market is located. The Bank is also required to perform certain ministerial acts, like presenting for redemption any financial asset for which the Bank has received notice of a call, or executing certificates required to obtain payments on financial assets.
The last subsection is subsection 2.15, which is entitled "Foreign Exchange Transactions, " and is at the heart of this dispute. This subsection provides that:
To facilitate the administration of Customer's trading and investment activity, Bank may, but will not be obliged to, enter into spot or forward foreign exchange contracts with Customer, or an Authorized Person, and may also provide foreign exchange contracts and facilities through its Affiliates or Subcustodians. Instructions, including standing Instructions, may be issued with respect to such contracts, but Bank may establish rules or limitations concerning any foreign exchange facility made available. In all cases where Bank, its Affiliates or Subcustodians enter into a master foreign exchange contract that covers foreign exchange transactions for the Accounts, the terms and conditions of that foreign exchange contract and, to the extent not inconsistent, this Agreement, will apply to such transactions.
(Emphasis supplied.) The parties at no point entered into a master foreign exchange contract.
The Custody Agreement further states that the "Customer authorizes Bank to accept and act upon any Instructions received by it without inquiry." Section 7.4 of the Custody Agreement warns that the Bank may have a "potential conflict of duty or interest" with respect to a client's transactions, and provides examples. The client therefore "acknowledges" that the Bank "may be in possession of information tending to show that the Instructions received may not be in the best interests of Customer but that Bank is not under any duty to disclose any such information."
The Custody Agreement also describes the "fees, expenses and other amounts" that LAMPERS owes to the Bank for the services that the Bank provides. In particular, section 4.1, states that
Customer will pay Bank for its services hereunder the fees set forth in Schedule A hereto or such other amounts as may be agreed upon in writing from time to time, together with Bank's reasonable out-of-pocket or incidental expenses, including, but not limited to, legal fees and tax or related fees incidental to processing by governmental authorities, issuers, or their agents.
(Emphasis supplied.) The accompanying Fee Schedule, which sets forth just four figures, includes a "Custody and Accounting Flat Fee Per Year" of $85, 900.00. Beneath this figure appears "Note: No Transaction Fees." The Fee Schedule also lists three fees that are assessed "per account per year." These fees are for "Compliance, " "Alternative Asset Services, " and "Performance Measurement, " and no one of these fees exceeds $4, 500.
Finally, pursuant to section 2.11, the Bank is required to send to the customer a formal statement of account, and is protected from claims arising from the disclosures in that statement unless they are made within sixty days. That section provides that the
Bank will not be liable with respect to any matter set forth in those portions of any Statement of Account or any such advice (or reasonably implied therefrom) to which Customer has not given Bank a written exception or objection within sixty (60) days of receipt of the Statement of Account, provided such matter is not the result of Bank's willful misconduct or bad faith.
Custodial clients of the Bank are able to execute FX transactions with the Bank in two ways. Clients can enter into "direct" FX transactions, in which the defendants quote an exchange rate based on current market rates and the client can decide whether to accept or reject the proposed rate. If the client accepts defendants' proposed rate, the transaction is executed at the agreed-upon rate. Alternatively, clients can elect to automate their FX transactions through "Standing Instructions" to the Bank. This automated program is called "AutoFX" and currency exchanges conducted through this program are sometimes called "Indirect" FX transactions.
To use the AutoFX program clients must enroll and create "Standing Instructions." LAMPERS enrolled in the AutoFX program sometime in or before January 2007. When a customer enrolls in the program and creates Standing Instructions, the customer does not individually negotiate the exchange rate for each transaction. Instead, the Standing Instructions direct the execution of the FX transaction on a recurring basis and JPMorgan simply complies.
In response to its customers' Standing Instructions, JPMorgan buys and sells currencies on the currency market. After the close of trading, JPMorgan's FX traders use a pricing matrix to examine the range of exchange rates that were available throughout the day. The Amended Complaint alleges that the traders then select a rate to charge the customer that is either higher or lower (depending on whether JPMorgan was buying or selling currency) than the rate JPMorgan received. For example, if a customer's Standing Instruction requested the purchase of Euros, and JPMorgan was able to purchase Euros for 1.40 at the prevailing market rate, the FX trader might then choose to charge the customer for the Euros at a rate of 1.42. As reflected by this example, the two-cent spread was retained by JPMorgan as its "commission" on the trade. In selecting the rate to charge customers, the defendants regularly chose the worst (or nearly the worst) rate of the day. On occasion, the defendants charged the customers a rate that fell outside the range of market prices available on the day the trade was executed.
The defendants advertised the benefits of the AutoFX program to their customers. In particular, they represented that AutoFX was designed to "reduce costs" and offer "competitive rates provided directly by the dealing room." Their website depicted the program as allowing "clients to outsource their FX requirements to JMorgan with all the associated benefits of workload, risk and cost reduction." The defendants also emphasized their own skill and value in connection with the program, indicating that their "size, scale and expertise... translates into fast, competitive and consistent pricing." The defendants described themselves as "the world's FX trading volume leader, '" and thus able to "offer a unique combination of comprehensive product expertise, time-zone support, superior liquidity, award-winning research and value-added strategies." In letters sent to custodial clients to solicit their enrollment in the AutoFX program - including a letter received by LAMPERS on June 8, 2009 - the Bank explained that automation of FX transactions would "benefit both the firm and its clients" and would "reduce the costs" of such transactions.
It is also alleged that the Bank represented that it would conduct Indirect FX transactions in accordance with "best execution" practices. The plaintiff alleges that the parties understood this to mean that the Bank would conduct "trading in such a manner that the client's total cost or proceeds in each transaction [was] the most favorable under the circumstances." In particular, LAMPERS points to two documents delivered in July 2007 and August 2010 - after LAMPERS had enrolled in AutoFX - which contained "important disclosures" of JPM's best execution obligations. Both mailings describe an enactment of the Markets in Financial Instruments Directive ("MiFID") - a European Union law governing transparency requirements for investment services - and JPM's obligations thereunder. The mailings stated that "MiFID best execution rules require that firms take all reasonable steps to obtain the best possible results when executing orders on behalf of clients." The disclosures also allegedly indicated that JPM's best-execution obligations applied to Indirect FX transactions by, for instance, stating that
[b]est execution is only owed when [JPM] accepts an order to execute a transaction on your behalf.... When [JPM] provides, quotes, or negotiates a price with you on request... it will not be receiving a client order' as part of a service where Best Execution will apply to determine the price given to you. The distinction is between:
Where you are relying on JPMorgan to get your best price, i.e., for JPMorgan to act on your behalf in protecting your interests, and
Where you merely request or take a price.
Custodial customers of the Bank received monthly account statements from the Bank. If the client had executed FX transactions, the account statement reflected the rate that the client was charged. The monthly account statement did not, however, provide the rate at which the Bank itself had acquired the currency it provided to the client, nor did it include the time when that underlying trade was executed.
Custodial clients who were enrolled in AutoFX also received, by default, AutoFX Confirmations. AutoFX Confirmations are trade confirmations that are automatically generated upon the commission of a transaction. In response to the defendants' encouragement, however, many custodial customers - including LAMPERS - executed "Suppress AutoFX Confirmations Forms." LAMPERS executed this form on February 21, 2007. If a customer executed the Suppress AutoFX Confirmations Form, it no longer received the automatically generated confirmation forms for its trades.
In January and February of 2011, two whistleblower actions filed against the Bank of New York Mellon ("BNY Mellon") were unsealed. See Commonwealth of Virginia, ex. Rel. FX Analytics v. The Bank of New York Mellon Corp., No. CL-2009-15377 (Va. Cir. Unsealed Jan. 21, 2011); State of Florida, ex rel. FX Analytics v. The Bank of New York Mellon Corp., No. 2009-CA-4140 (Fla. Cir. Unsealed Feb. 7, 2011). These actions alleged that BNY Mellon was charging undisclosed mark-ups for FX transactions executed for its customers. Following the unsealing, LAMPERS performed its own "Currency Audit" of 1, 542 FX transactions executed by the defendants for LAMPERS and determined, as described above, that the defendants were systematically charging LAMPERS uncompetitive FX rates. This law suit followed.
LAMPERS filed its original complaint on August 30, 2012. On November 5, the Case Management Order appointed LAMPERS as lead plaintiff. In accordance with the Case Management Order, LAMPERS filed the Amended Complaint on January 17, 2013. The Amended Complaint includes five causes of action: ...