After vilifying Virginia’s intrepid Attorney General Ken Cuccinelli for challenging Obamacare, the University of Virginia and the U.S. Environmental Protection Agency, his critics are strangely silent now that Cuccinelli is going after the oldest bank in America on behalf of retired teachers, police officers and other state and local government employees, including those in Arlington and Fairfax counties. After months of trying to resolve an issue with the Bank of New York Mellon over its handling of the Virginia Retirement System account, Cuccinelli filed a lawsuit in Fairfax County accusing the bank of swindling the state pension system out of $40 million by secretly charging VRS higher rates for foreign currency exchanges than the bank was receiving — and pocketing the difference.
Citing a February 2008 internal email from bank managing director Jorge Rodriguez — who admitted that “full transparency” of this practice to the bank’s custodial clients would “reduce margins dramatically” — the lawsuit seeks treble damages of $120 million allowed under Virginia’s Fraud Against Taxpayers Act and another $811 million in civil damages. A similar lawsuit was also filed by Florida Attorney General Pamela Jo Bondi.
It’s important to note that the bank is already paid $4.5 million to manage VRS’ $54.3 billion in investments and has a fiduciary duty to disclose all fees associated with each trade. The lawsuit alleges that the bank’s custodial reports did not time-stamp trades made on behalf of VRS — allowing it to fraudulently charge the pension fund the highest foreign exchange rate of the day — even though the bank’s website promised that such currency exchanges would be “free of charge.”
A bank spokesman arrogantly dismissed the allegations, claiming that the two lawsuits are based on “a flawed understanding of foreign currency markets.” But the original case was filed in 2009 on behalf of the Florida State Board of Administration by a whistleblowing insider at Delaware-based FX Analytics. That plaintiff had more than 20 years of experience, including at BNYM’s own Pittsburgh trading office, and thus was in a position to have direct knowledge of the shady practice of adding “hidden spreads” to foreign exchange trades in order to maximize profits.
So, kudos to Cuccinelli for attempting to recover funds that rightfully belong to Virginia’s state pension fund and its beneficiaries. Winning the lawsuit won’t solve the bigger problem of VRS’ $17 billion unfunded liability, but every recovered dollar helps. And VRS should definitely start looking for a new bank.
