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In re Bank of New York Mellon Corp. Forex Transactions Litigation

United States District Court, S.D. New York

May 1, 2014

In re: BANK OF NEW YORK MELLON CORP. FOREX TRANSACTIONS LITIGATION. This document relates to: Los Angeles Cty. Emp. Ret. Ass'n ex rel. FX Analytics
v.
The Bank of New York Mellon Corp., 12 Civ. 8990 (LAK), In re Bank of New York Mellon Corp. False Claims Act Foreign Exch. Litig., 12 Civ. 3064 (LAK)

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[Copyrighted Material Omitted]

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For Los Angeles Department of Water and Power Retirement Plan and Los Angeles County Employee Retirement Association, Plaintiffs: Steven N. Williams, Adam J. Zapala, Eric J. Buescher, Gene W. Kim, COTCHETT, PITRE & MCCARTHY LLP; Carmen A. Trutanich, Alan L. Manning, Marie McTeague, OFFICE OF THE LOS ANGELES CITY ATTORNEY.

For Plaintiff/Relator: Richard H. Heimann, Lexi J. Hazam, Robert L. Lieff, LIEFF, CABRASER, HEIMANN & BERNSTEIN, LLP; Philip R. Michael, MICHAEL LAW GROUP; Michael P. Thornton, Michael A. Lesser, Evan R. Hoffman, THORNTON & NAUMES LLP.

For Defendants: Reid M. Figel, Rebecca A. Beynon, David L. Schwarz, Derek T. Ho, Gregory G. Rapawy, Joshua D. Branson, KELLOGG, HUBER, HANSEN, TODD, EVANS & FIGEL, P.L.L.C.

OPINION

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MEMORANDUM OPINION

Lewis A. Kaplan, United States District Judge.

This is yet the next chapter in the litigation regarding the standing instruction foreign exchange (" FX" ) trading service provided by Bank of New York Mellon (" BNY Mellon" )[1] to its custodial customers. In Southeast Pennsylvania Transportation Authority v. Bank of New York Mellon Corp . (" SEPTA " ),[2] this Court sustained a BNY Mellon customer's claim of breach of contract and, to a limited extent, its claim of breach of fiduciary duty. In United States v. Bank of New York Mellon (" DOJ " ),[3] it sustained in part the federal government's claims that BNY Mellon committed mail and wire fraud and is liable for civil penalties under Section 951a of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, commonly known as FIRREA.[4]

Here, a relator brings claims on behalf of four California governmental entities against BNY Mellon, its affiliates, and unnamed individuals under the California

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False Claims Act (" CFCA" ). Two of these entities have intervened to pursue their own claims. The matters are before the Court on defendants' motions to dismiss the operative complaints.

Background

I. Procedural History

Relator FX Analytics first filed a complaint against defendants under seal in Alameda County Superior Court in October 2009. It asserted CFCA claims on behalf of a number of California governmental entities including, inter alia, Los Angeles County Retirement Association (" LACERA" ), Los Angeles Department of Water & Power Employees' Retirement Plan (" LADWP" ), the Santa Barbara County Employees' Retirement System Fund (" SBCERS" ), and the Tulare County Employees' Retirement Association Fund (" TCERS" ).[5] LACERA, LADWP, and other entities not relevant here subsequently intervened in the action and asserted claims under the CFCA, the California Business and Professions Code, and the common law. In November 2011, defendants removed the case to the United States District Court for the Northern District of California and later moved to dismiss.

In March 2012, the California district court held that none of the CFCA claims stated a legally sufficient claim, upheld the legal sufficiency of all of the non-CFCA claims except that for unjust enrichment, and held that the venue was improper as to LACERA's complaint in consequence of a forum selection clause in the relevant custody agreement.[6] The court permitted plaintiffs to seek leave to amend and ruled that the dismissal of LACERA's claims was without prejudice to their being re-filed in the proper venue. In April 2012, the case was transferred to this Court by the Judicial Panel on Multidistrict Litigation (" JPML" ). Both relator and LADWP eventually filed Fourth Amended Complaints. Defendants moved to dismiss both complaints in February 2013.

Meanwhile, pursuant to the March 2012 opinion, LACERA re-filed its claims in a new complaint in the Central District of California in September 2012. That case too was transferred to this Court by the JPML, and defendants moved to dismiss in December 2012.

Following filing of the motions to dismiss in December 2012, both LACERA and LADWP filed amended complaints, LACERA's first and LADWP's fifth. As previously indicated, the Court treats the December 2012 motions as being addressed to the subsequent amended complaints in the interest of judicial economy.

II. Factual Background

LACERA, LADWP, SBCERS, and TCERS each had a custodial agreement with BNY Mellon[7] whereby BNY Mellon agreed to hold various assets, including cash and securities, on each's behalf. BNY Mellon expressly acknowledged in its agreements with LADWP and LACERA that it had assumed fiduciary obligations, at least in certain respects.[8]

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As part of their custodial relationships, each customer regularly received monthly invoices for payment in accordance with a particular fee schedule.[9] The fee schedules varied by client.[10] In each case, however, the fee schedule specified that the client was responsible for certain " custodial fees" --fees that were fixed or that varied with the value of the assets BNY Mellon held on the client's behalf.[11] Moreover, the fee schedule in each case specified certain " transaction fees" --fees that were tied to individual transactions conducted by the client with respect to its assets in BNY Mellon custody.[12]

From time to time, the clients wished to engage in FX trading, e.g., to convert foreign currency dividends into U.S. dollars. Each used BNY Mellon's standing instruction service to do so. The Court assumes familiarity with its prior opinions that lay out the details of this program.[13] As the Court recently summarized,

" In standing instruction ('SI') trading, BNY Mellon automatically converted its customers' funds from one currency to another as such needs arose, informing the customer of the executed price only after the fact. It described the service, among other things, as providing 'best execution.' Plaintiffs in this and other actions have alleged, however, that this term had an industry meaning inconsistent with the Bank's actual pricing practices. These practices, which were not disclosed to customers, were to price the trades at or near the least favorable interbank market rate of a given trading day. SI trading was highly profitable for BNY Mellon . . . as its margins well exceeded those of directly negotiated FX transactions." [14]

LACERA and LADWP allege that they or their investment managers signed certain FX procedure forms relating to the program.[15] One hyperlink on this form went to an FX policies and procedures document, and another went to the Standing Instructions Page, which contained the representation that the program provided best execution. These items are discussed in more detail in SEPTA .[16]

Each client received monthly transaction statements relating to standing instruction transactions that indicated the prices at which their currencies had been converted during the prior month.[17] These statements contained no requests for action or payment by the client, as the client's account already had been debited or credited by BNY Mellon in accordance with the conversion rate relevant to the given

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trade.[18] But plaintiffs' contracts did afford them a fixed period in which they could object to any transaction listed on the report.[19]

Aside from the FX conversion rates at which BNY Mellon executed the trades, certain clients allege that they paid separate and additional transaction fees for each standing instruction trade and that these transaction fees were billed on the custodial invoices discussed above. In particular, LACERA alleges that it was charged a fee ranging from $12 to $75 for each standing instruction trade.[20] Similarly, the relator alleges that SBCERS and TCERS paid " transaction fees for custodial standing instruction FX trades as well as 3rd party FX transactions." [21] LADWP alleges that BNY Mellon represented " that its Standing Instruction service was 'free of charge.'" [22]

Discussion

LADWP, LACERA, and relator (on behalf of TCERS and SBCERS) each brings claims under the CFCA. LADWP and LACERA bring claims also of breach of contract, breach of fiduciary duty, fraud by concealment, and violation of California Business and Professional Code Section 17200.[23]

I. Breach of Contract

LACERA and LADWP contend that defendants are liable for breach of contract on a number of grounds, including their alleged failures to (1) provide best execution, (2) net trades, (3) keep proper records, (4) provide competitive rates, (5) exercise reasonable care in the execution of duties, and (6) disclose the standing instruction pricing scheme.[24]

The Court denies defendants' motions insofar as plaintiffs advance the theory of breach of contract this Court sustained in SEPTA --that FX procedure forms relating to standing instruction incorporated a contractual best execution obligation that defendants allegedly failed to meet.[25] The Court, however, grants the motion as to all other theories of breach of contract.

Plaintiffs allege that defendants have breached a contractual obligation to net their trades based on a representation on defendants' website that they would aggregate and net trades " based on guidelines

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tailored to client needs." [26] Defendants contend that this representation did not promise netting but simply made it available to clients who negotiated customized netting arrangements. But, as this Court observed in DOJ, that understanding of the statement cannot be determined as a matter of law at this stage.[27] Nevertheless, the complaints fail to allege that this representation on the website formed part of a contract among the parties. This theory therefore is dismissed.

Plaintiffs allege also that the contracts obliged defendants " to provide extremely competitive market driven rates" and that defendants asserted that the competitiveness of their rates was ensured through a report showing rates falling outside of the daily range.[28] This theory too fails.

The Court has accepted the sufficiency of plaintiffs' " best execution" theory because plaintiffs plausibly have alleged that the term has an industry meaning inconsistent with defendants' pricing practices.[29] Plaintiffs allege nothing comparable with regard to " competitive rates." Plaintiffs do not allege that BNY Mellon's pricing was uncompetitive in the universe of similar standing instruction products. Moreover, the Court questions whether defendants' alleged pledge to " strive[]" to provide competitive rates could be an enforceable contractual promise.[30]

Nor may plaintiffs proceed on a theory that defendants' pricing breached a contractual standard of reasonable care. To be sure, plaintiffs allege that defendants assumed a contractual duty to discharge their duties " with the competence, care, skill, prudence, and diligence prevailing in the custodial industry." [31] But, as defendants point out, this is a duty of skill, distinct from a duty of loyalty.[32] Plaintiffs do not allege any facts suggestive of any failure on defendants' part to perform in a skillful, careful, or diligent manner.

Plaintiffs assert also a breach of the implied covenant of good faith and fair dealing. But as the Court explained in SEPTA, that contention is inapposite in this context.[33]

II. Breach of Fiduciary Duty

LACERA and LADWP allege that their custodial contracts created a fiduciary relationship and that defendants breached their fiduciary duties. The Court considers the two alleged breaches of breach of fiduciary duty they advance.

A. Fiduciary Obligation to Provide Best Prices

First, SEPTA alleged that BNY Mellon was acting in a ...


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