Internal BNY Mellon Documents Show Panic
By JEAN EAGLESHAM And MICHAEL SICONOLFI
An informant in a state fraud case against Bank of New York Mellon Corp. has provided prosecutors a rare inside peek into how the bank allegedly scrambled to contain the fallout from a fast-growing government investigation, according to hundreds of pages of confidential documents.Documents Relating to State Fraud Case Against Bank of New York Mellon Corp.
The bank also altered its website, changing the wording of its trading practices. And when a veteran bank official heard about the government investigation, she said: "It's over, it's all over," according to the informant.
The documents, which include company materials, emails and observations, were submitted to Florida prosecutors by lawyers for whistleblower Grant Wilson and obtained by The Wall Street Journal in an open-records request.
Mr. Wilson operated as a government informant for two years while working as a currency trader at BNY Mellon, giving him an extraordinary view of what was happening inside the bank as the investigation unfolded. The extensive documentation, including his descriptions of how the bank processed trades that allegedly resulted in client overcharges, could increase pressure on BNY Mellon as it battles a widening law-enforcement probe.
Five states, including Florida, and the Manhattan U.S. attorney have filed civil lawsuits over the past several months against BNY Mellon, seeking a total of more than $2 billion in damages. The suits allege the bank defrauded pension funds and other clients by systematically overcharging them on currency transactions.
BNY Mellon denies any wrongdoing and is fighting the suits. A bank spokesman said, "A handful of purported statements cherry-picked from millions of documents gathered over a decade, do not reflect the way we do business or the value we provide our clients."
Mr. Wilson declined to comment. His lawyer, Michael A. Lesser of Thornton & Naumes LLP in Boston, declined to comment on the documents, saying the matter is in "active litigation."
Mr. Wilson, 53 years old, is part of a whistleblower group that can seek a share of as much as 25% of any recovery the states obtain in many of the BNY Mellon cases.
![[fxprobe1228]](http://si.wsj.net/public/resources/images/OB-RE299_fxprob_D_20111228085113.jpg)
Bloomberg News From the Archive
- BNY Mellon Strikes Balance in Currency Suits 11/15/2011
- BNY Mellon in Talks Over Currency Suit 11/4/2011
- Suits Claim BNY Mellon Overcharged 10/27/2011
- Informant Surfaces in BNY Probe 10/12/2011
- BNY Mellon Forex Trades Cost Pensions 9/14/2011
- Inside a Battle Over Forex 5/23/2011
- Trading Dispute Divides BNY, Fund 3/11/2011
- Suit Alleges Mellon Created Fake Trades, Overcharged 2/04/2011
Mr. Wilson in the documents provides intimate snapshots of his colleagues, including details about their families, personal problems and financial standing. The information could be used by prosecutors to help determine who could be witnesses in the case against BNY Mellon—and who could be hostile. Mr. Wilson cited one trader whom he described as "not a happy camper" who "hates the bank as it has not appreciated her vast talent over the years."
Another was valued by managers as a risk taker who "brings guts to the table," Mr. Wilson says in the documents. A colleague deemed by Mr. Wilson as less-talented "spends all his income on exotic fishing trips," he says.
At issue in the suits filed against BNY Mellon is its "standing-instruction" service. That is when pension funds and other clients allow the bank unilaterally to handle their foreign-exchange, or FX, transactions. Clients could instead negotiate their own foreign-exchange trades, but that would require staff and technology.
In the documents, Mr. Wilson described how a "transaction desk" collected currency trades for BNY Mellon's "standing-instruction" clients and then later in the day set the price at which the bank would record those transactions. The prices often were at or near the day's least-favorable exchange rates, state attorneys general and prosecutors allege, with the bank profiting from the difference.
Mr. Wilson describes the pressure inside BNY Mellon after California prosecutors accused rival State Street Corp. in an October 2009 civil suit of overcharging customers in currency trading. State Street denies wrongdoing and is fighting the currency-trading litigation.
Soon after news of the State Street suit, BNY Mellon changed its description of its standing-instruction service, according to copies of pages from the bank's website submitted by the whistleblower. The bank had called the service "free of charge" and designed to help clients "minimize risks and costs."
By November 2009, the "free of charge" wording had disappeared; instead, the bank described its service as a "complete FX solution."
BNY Mellon said in court filings that it routinely updates its marketing materials and the "free of charge" language referred to the fact there was no transaction fee for the currency trades.
Richard Mahoney, former chief of BNY Mellon's global markets division, told an employee meeting in early 2010 that the company had by then received 16 subpoenas, according to Mr. Wilson.
Mr. Mahoney—who the whistleblower said was nicknamed "Rambo" by co-workers for his military background and propensity "to rant and rave"—told staff "we do not have to tell anyone how much money we make on our dealings," according to the informant. Mr. Mahoney, who retired from BNY Mellon earlier this year, couldn't be reached for comment.
The whistleblower also told prosecutors how one of his colleagues in Pittsburgh, Susan Pfister, allegedly reacted when she learned in early 2010 that BNY Mellon, as well as State Street, was being investigated for its currency-trading practices. She said: "It's over, it's all over," according to Mr. Wilson, allegedly reflecting concerns within BNY Mellon that big profits the bank had long generated from standing-instruction currency trading were going to disappear.
Ms. Pfister's alleged comment wasn't included in the civil suit filed by the Florida state attorney general in August, which alleges that BNY Mellon overcharged Florida state pension funds in currency trading.
Ms. Pfister declined to comment through a spokesman for BNY Mellon.
An internal BNY Mellon memo in October 2009 provided by Mr. Wilson said some clients were shifting away from the standing-instruction service to a "negotiated" model—agreeing on the exchange rate for each trade—where the bank's profit margin was lower "by a factor of 10-20 times."
"Once this is done they will never return to their previous model," according to the confidential memo.
The BNY Mellon spokesman said: "We are confident that we provide our clients and their investment managers with valuable foreign-exchange services at competitive prices and the information needed to make informed trading decisions."
After reports surfaced that BNY Mellon was under investigation, executives were torn over how to deal with inquiries from customers demanding to know if they had been overcharged, Mr. Wilson told prosecutors in May 2010. He told prosecutors that Mr. Mahoney "wants to tell them to 'go pound sand,' " but another executive who was "afraid of upsetting custody clients" disagreed.
The documents reveal that at least one other former BNY Mellon employee has offered to help prosecutors build their case against the bank. The salesperson told the Florida attorney general in a letter earlier this year that he could describe how he had been "trained in committing fraud using various strategies."
A spokeswoman for the Florida attorney general declined to comment.
Mr. Wilson faced pressure operating for two years inside BNY Mellon as a secret whistleblower, where he collected internal bank documents and recounted to the government what colleagues said, according to a person familiar with the matter. As news surfaced that an informant was assisting the government in the currency investigation, the bank's foreign-exchange traders grew concerned about a leaker, according to a person familiar with the matter.
On the trading desk, in downtown Pittsburgh, they tried to guess the identity of the whistleblower, asking each other, "Is it you?" this person says.
Mr. Wilson "is concerned about the security of his identity, as he continues to work at the bank," according to a March 3, 2010, letter from his lawyer, Mr. Lesser, to the Florida attorney general's office. "Things are reaching a fever pitch in the office."
Write to Jean Eaglesham at jean.eaglesham@wsj.com and Michael Siconolfi at michael.siconolfi@wsj.com
OZONE PARK, N.Y. – Though he admitted that there were others who could have discovered it, New York Racing Association president and CEO Charles Hayward on Tuesday took responsibility for the mistake that led to NYRA charging too high a takeout rate on certain wagers for a 15-month period, an error that cost bettors $7.9 million.
“I’m the CEO, ultimately I’m responsible,” Hayward said Tuesday in his first public comments on the issue, which surfaced on Dec. 21. “If you’re looking to blame somebody, that’d be me. The buck stops here. There’s a lot of people both inside NYRA and the state that had the opportunity to review that and the bottom line is we missed it.”
It was revealed last week that NYRA had improperly charged a takeout rate of 26 percent – 1 percentage point higher than allowed by law – on exotic wagers, including trifectas, superfectas, pick threes, pick fours, and the grand slam – from Sept. 15, 2010 through Dec. 18, 2011. Hayward clarified that the pick six wager was not impacted by this overcharge because state law allows NYRA to charge a takeout rate of up to 36 percent on that wager.
As an attempt to rectify the situation, NYRA on Wednesday instituted a 2 percentage point decrease on the takeout rate on the wagers in question. Hayward said the takeout reduction on those wagers would be permanent and not for only 15 months as had been reported by some outlets. Hayward declined to comment on whether NYRA would seek a takeout reduction on straight win, place and show wagers and two-horse wagers such as the exacta and daily double.
NYRA also has committed, as per request by the Franchise Oversight Board and the State Racing and Wagering Board, to refund money to those customers it can successfully identify as being overcharged. Hayward said that of the $7.9 million overcharged, approximately $1.1 million was to bettors ontrack. Of that total, approximately $420,000 was wagered through NYRA Rewards, making it possible for NYRA to track down those bettors.
“The rest of the off-track monies the simulcast holder was largely the beneficiary of that higher takeout,” Hayward said.
Hayward pointed out that NYRA’s takeout rates are published daily in the racing program, Daily Racing Form, as well as in all simulcast contracts, which are approved by the New York State Racing and Wagering Board.
The board has also instructed New York State’s off-track betting corporations to track down bettors who may have been affected by the takeout overcharge.
Hayward noted that NYRA “opposed initially” the takeout increase when it was proposed as part of the franchise agreement because “we felt it was bad for business.”
Robert Megna, the state’s budget director and chairman of the Franchise Oversight Board, which also didn’t detect the mistake, sent a scolding letter to Hayward last week which in part chastised him for comments he made defending NYRA’s wages paid to its executives.
“You have repeatedly argued that the high compensation paid to NYRA officials is needed to ensure that the best talent is attracted to the Association,” Megna wrote. “That position, of which we are skeptical to begin with, rings hollow in light of NYRA’s failure to manage a most basic accounting task.”
Since Oct. 5, NYRA has been operating without a designated chief financial officer. Ellen McClain, who had been the CFO since July 2009, was promoted to chief operating officer, replacing Hal Handel, who left the company in September. Hayward said NYRA hopes to hire a CFO sometime in January.
“We made a mistake,” he said. “We’re trying to do what we can to fix that for the customers, but it doesn’t eliminate the fact that we made a mistake, for which I apologize. The most important thing for the state is to have a healthy racing and breeding program, and I think we’re a lot better off today than we were two years ago, a lot better off than we were four years ago, a lot better off than we were six years ago.”
“I’m the CEO, ultimately I’m responsible,” Hayward said Tuesday in his first public comments on the issue, which surfaced on Dec. 21. “If you’re looking to blame somebody, that’d be me. The buck stops here. There’s a lot of people both inside NYRA and the state that had the opportunity to review that and the bottom line is we missed it.”
It was revealed last week that NYRA had improperly charged a takeout rate of 26 percent – 1 percentage point higher than allowed by law – on exotic wagers, including trifectas, superfectas, pick threes, pick fours, and the grand slam – from Sept. 15, 2010 through Dec. 18, 2011. Hayward clarified that the pick six wager was not impacted by this overcharge because state law allows NYRA to charge a takeout rate of up to 36 percent on that wager.
As an attempt to rectify the situation, NYRA on Wednesday instituted a 2 percentage point decrease on the takeout rate on the wagers in question. Hayward said the takeout reduction on those wagers would be permanent and not for only 15 months as had been reported by some outlets. Hayward declined to comment on whether NYRA would seek a takeout reduction on straight win, place and show wagers and two-horse wagers such as the exacta and daily double.
NYRA also has committed, as per request by the Franchise Oversight Board and the State Racing and Wagering Board, to refund money to those customers it can successfully identify as being overcharged. Hayward said that of the $7.9 million overcharged, approximately $1.1 million was to bettors ontrack. Of that total, approximately $420,000 was wagered through NYRA Rewards, making it possible for NYRA to track down those bettors.
“The rest of the off-track monies the simulcast holder was largely the beneficiary of that higher takeout,” Hayward said.
Hayward pointed out that NYRA’s takeout rates are published daily in the racing program, Daily Racing Form, as well as in all simulcast contracts, which are approved by the New York State Racing and Wagering Board.
The board has also instructed New York State’s off-track betting corporations to track down bettors who may have been affected by the takeout overcharge.
Hayward noted that NYRA “opposed initially” the takeout increase when it was proposed as part of the franchise agreement because “we felt it was bad for business.”
Robert Megna, the state’s budget director and chairman of the Franchise Oversight Board, which also didn’t detect the mistake, sent a scolding letter to Hayward last week which in part chastised him for comments he made defending NYRA’s wages paid to its executives.
“You have repeatedly argued that the high compensation paid to NYRA officials is needed to ensure that the best talent is attracted to the Association,” Megna wrote. “That position, of which we are skeptical to begin with, rings hollow in light of NYRA’s failure to manage a most basic accounting task.”
Since Oct. 5, NYRA has been operating without a designated chief financial officer. Ellen McClain, who had been the CFO since July 2009, was promoted to chief operating officer, replacing Hal Handel, who left the company in September. Hayward said NYRA hopes to hire a CFO sometime in January.
“We made a mistake,” he said. “We’re trying to do what we can to fix that for the customers, but it doesn’t eliminate the fact that we made a mistake, for which I apologize. The most important thing for the state is to have a healthy racing and breeding program, and I think we’re a lot better off today than we were two years ago, a lot better off than we were four years ago, a lot better off than we were six years ago.”
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