Virginia’s Cuccinelli sues Bank of New York Mellon, alleging pension fraud

August 11, 2011

In a highly unusual move, Virginia sued a major New York financial institution late Thursday, alleging that it defrauded state and local pension funds and seeking an extraordinary $900 million in damages and penalties.

The lawsuit, filed by Virginia Attorney General Ken Cuccinelli II, claims that since 2000 the Bank of New York Mellon defrauded the Virginia Retirement System and the pension funds in Arlington and Fairfax counties 73,000 times.

“Now all of Virginia taxpayers are harmed,” Cuccinelli (R) said in an interview. “If you assume the taxpayers are going to make good on whatever obligations these funds undertake, really the people who are going to be harmed by this as a particular matter are the taxpayers.”

Cuccinelli is seeking $120 million plus interest in damages and $811 million in civil penalties for what he alleges is $40 million in fraud. He accuses currency traders for the bank of skimming profits of transactions conducted for six state and local public pension funds by falsely reporting the rate at which currency was exchanged.

The bank is disputing the claims and will fight them in court, a spokesman said.

“The lawsuit filed by the Virginia attorney general is unwarranted and reflects a flawed understanding of foreign currency markets,” Bank of New York Mellon spokesman Kevin Heine said. “We will fight these claims in court and are confident we will prevail. . . .While our first choice is always an amicable resolution, we refuse to be coerced into paying for and admitting to wrongdoing where none exists.”

The lawsuit, filed in Fairfax County under the Virginia Fraud Against Taxpayers Act, a 2002 statute designed to encourage whistleblowers to come forward, is one of the largest non-health-care cases brought anywhere in the nation, legal experts say.

In the history of the federal version of the state law, there have been only two pharmaceutical cases that received more than $1 billion in damages and penalties. Both were brought by the U.S. Justice Department and more than 20 states.

Cuccinelli intervened in January in a lawsuit filed by a private whistleblower that sought $150 million in damages from the Bank of New York Mellon, which has served as the master custodian of the Virginia Retirement System since 1988. After mediation failed last week, he filed a lawsuit.

“We’re always willing to listen, but, in our judgment, we reached a point where they just don’t take their offense seriously,” he said.

According to the attorney general’s office, the bank is paid $4.5 million a year to hold and protect Virginia’s pensions. It manages $55.1 billion in state and local government retirement funds.

The suit was initiated by a Delaware-based partnership called FX Analytics, whose members, according to the legal complaint, had “personal knowledge” of the fraud based on “extensive knowledge and experience” with the Bank of New York Mellon.

“The damages in the attorney general’s complaint are based on hard data and are not plucked from thin air for shock value,” said Zachary Kitts, an attorney for FX Analytics. 

According to Cuccinelli’s office, the Bank of New York Mellon would watch currency markets and conduct trades on behalf of Virginia at the most advantageous price it could find during a trading day. But when the bank reported the results of the trade to the state, it would report that the state had received the day’s least advantageous price. It would then pocket the difference, the lawsuit claims.

The Virginia suit is similar to one filed in California in 2009 by then-Attorney General Jerry Brown (D) against State Street, seeking $200 million in damages over the same alleged foreign currency exchange practices. The California suit remains in litigation; State Street has denied wrongdoing. In October, Washington state announced that it had reached an $11.7 million settlement with State Street Bank, resolving a similar dispute.

In addition to the funds it holds for Virginia’s pension fund, the Bank of New York Mellon is also paid $400,000 a year to serve in the same role for the $4.9 billion Fairfax retirement system and receives almost $136,000 annually from Arlington to serve as custodian of the county’s $1.27 billion pension.

Cuccinelli said he has received calls from officials in other states, which are now researching their pension funds contracts with Bank of New York Mellon.

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