GLOBAL - A dozen New York City pension funds have filed a $2bn (€1.5bn) lawsuit against BNY Mellon, claiming the institution committed fraud over a 10-year period by overcharging clients for foreign exchange transactions.

BNY Mellon dismissed the claims as "flat out wrong" and said they reflected a fundamental misunderstanding of custodian banks' role and the way FX markets are run.

The case - filed by John Liu, comptroller of the City of New York, and the city's attorney general Eric Schneiderman on behalf of the state retirement schemes in the New York Supreme Court yesterday - alleges BNY Mellon priced currency transactions at the "worst rate" they had traded at on a given day, rather than the market rate at time of the trade.

The filing said: "The bank then pocketed for itself the difference between the worst price of the day it had given clients and the market price existing at the time it executed the transaction. Through this fraud, it earned $2bn over a 10-year period."

The complainants - including the New York City Employees' Retirement System, the Teachers' Retirement System of the City of New York and New York City Police Pension Fund, with combined assets of nearly $90bn -  claim this was possible because some transactions were pre-authorised and that the institution did not inform clients that transactions conducted via standing instruction (SI) were done using the day's worst rate.

"Instead," said Liu and Schneiderman in the filing, "it flagrantly misrepresented its practice, writing to clients that, in executing SI transactions, the Bank would obtain the 'best rate of the day,' 'best execution' and 'the interbank market rate at the time of execution'."

They also said that BNY Mellon - over a decade from 2001 onward - engaged in a "campaign of deception" to introduce both private and state clients to SI, despite the policy guaranteeing them the worst price on all currency transactions.

They said the bank used the "artificially inflated" Central Bank of China exchange rate for the Taiwanese dollar, and while this was referred to as the manipulated rate, the filing alleges it was nonetheless used to the detriment of its clients.

The filing references a similar lawsuit brought against State Street Bank in late 2009 by two of California's largest public pension funds, CalSTERS and CalPERS - for teachers and state employees, respectively - that had allegedly prompted a former BNY Mellon employee to send an email to the bank's head of business development for global sales asking "Is this game over?".

The email, cited in the filing, further asked if it were not time for an employee involved in the SI practice to retire, "after raping the custodial accounts, all 'Public Trust' money".

In a statement, BNY Mellon said: "We will defend ourselves vigorously on behalf of our
shareholders, including many pension funds, and our more than 50,000 employees, 8,700 of whom are based in New York."

Of the lawsuit, it said: "This action is prosecutorial overreach that ill serves New York, New Yorkers and the pension funds whose interests the Attorney General purports to advance.

"While we recognise that capitulating to the office's demands might avoid some nasty headlines, we refuse to be coerced into admitting to and paying for wrongdoing that does not exist."