Op/Ed
Published: February 19, 2011
Malawer: Foreign exchange dealings and Virginia
By STUART S. MALAWER
Virginia Attorney General
Ken Cuccinelli has gotten it right. Intervening in the pending whistleblower
litigation in the Fairfax County Circuit Court against the Bank of New York
Mellon, involving the Virginia Retirement System, is good public policy.
It is argued in the case
that the bank intentionally charged the VRS different rates for converting
dollars to foreign currencies and that the bank pocketed the differences and
reported inaccurate data to mislead the VRS.
Some facts: It is alleged
in the private lawsuit in the Fairfax County Circuit Court against Bank of New
York Mellon that the bank cherry-picked prices and then falsely reported foreign
exchange transactions.
Specifically, when the bank
was buying foreign currency for the VRS so it could participate in global
financial markets, the bank would buy foreign currencies at a lower price during
the day but report to the VRS that it had paid a higher exchange price. Foreign
exchange rates trade in a range during a day that may be quite significant.
Thus, the bank got more foreign currency at the lower price but remitted a
smaller amount of the foreign currency to the VRS, saying that it had to pay
more for the foreign currency than it actually did. The bank would similarly
overcharge when the pension fund sold foreign currencies.
An analogy to buying and
selling a home makes this situation perfectly clear. What if a broker went to a
house closing, filled out a HUD 1 form, and told the buyer that the price was $1
million, when in fact the property price was $800,000, and then pocketed the
difference? We would be talking about criminal sanctions, or at a minimum, a
breach of fiduciary duty and the duty of good faith. That's what we may have
here — an unethical bank practice of improper charges and transactions. In
addition, we might have a breach of fiduciary duty by the officers and directors
of the VRS who allowed this to go on undetected.
I do not know what is going
on with national banks. During the same week that the foreign-exchange
transactions of the Bank of New York Mellon became public, JPMorgan was sued for
breaching its fiduciary obligations to a number of parties by profiting from its
dealings with Bernie Madoff when the bank closed its eyes to questionable and
poorly documented transactions. Madoff said from prison that he was amazed by
the failure of banks to rein him in.
Public pension funds have
doubled their international transactions in the past 15 years. Recently, it was
reported that some of the nation's largest investment firms were overcharged in
their foreign-currency transactions. For example, Black Rock, Inc., the world's
largest fund manager, identified questionable pricing issues with the Bank of
New York's buying or selling currency at prices favorable to the bank under
"standard instructions" rather than at the most beneficial prices for
its customer, Black Rock, Inc.
A national bank that is
trying to systematically profit improperly at the expense of the Commonwealth of
Virginia and its pension fund should be called to answer in the courts of
Virginia for its double-dealing.
Stuart S. Malawer is distinguished service professor of law and
international trade at george mason university (school of public policy). He may
be reached at stuartmalawer@msn.com