The Wall Street Journal has a good investigation that advances its series of stories looking at how banks, and particularly Bank of New York Mellon, gouged pension funds on currency trades.

The funds had standing orders to let banks exchange currency when they do other international trades that require different currencies. But BNY Mellon appears to have priced the trades inappropriately:

Separately, a Wall Street Journal examination of almost four years of currency-trading data for two U.S. pension funds in California and Massachusetts indicates that BNY Mellon often gave both funds exactly the same exchange rates.

According to the Journal analysis, the rates BNY Mellon gave the two funds often were at or near the less favorable ends of the daily trading range.

The WSJ FOIA’d the pension funds records and compared the two, finding that half of the trades were priced in the worst 10 percent trading range of any given day—five times the rate you’d expect if they were being placed fairly and randomly.

And it reports on a new lawsuit by Florida and Virginia that has something of a smoking gun:

The complaint cites what it describes as a 2008 email from a senior BNY Mellon banker, Jorge Rodriguez, warning his colleagues that if the bank was required to provide “full transparency” to its clients, the clients’ “ability to carefully monitor each and every trade at the time of execution” would eat into profits by reducing the bank’s “margins dramatically.”

And here’s another:

An internal 2008 BNY Mellon document reviewed by the Journal said large currency-price swings help the bank’s revenue because they allow traders to “capture greater trading gains” when executing currency trades for institutional clients.

BNY Mellon denies all wrongdoing and hits back at the Journal, which is good to quote them on it (emphasis mine)…

The bank said its standing-instruction clients receive pricing within the “interbank trading range,” the market where global banks trade currencies. “To call these rates ‘least favorable’ is factually incorrect and misleading,” a spokesman said.

And then go right on ahead and hit back:

An analysis of the Los Angeles fund’s trades showed that 48% of the currency trades between 2007 and 2010 were within 10% of each day’s trading range that was least favorable to the fund.

For the same time period, the Massachusetts data showed that 50% of the trades were priced within 10% of the least favorable range.

Nicely done.

Here’s the kicker, which further shows that these bad prices couldn’t have been accidental:

Of a total of 5,721 trades analyzed by the Journal, the funds traded the same currencies on the same days 3,012 times. They received the exact same price for 2,299 of those trades, or 76% of the time.

If there’s a miss here it’s that we’re not given any idea how much money this might have cost pension funds. A previous WSJ story reported that one lawsuit said foreign-exchange traders gouged them for $56 million. Washington fund settled a lawsuit for $12 million.

That’s a lot of money.

Very good work by the Journal.


If you'd like to help CJR and win a chance at one of 10 free print subscriptions, take a brief survey for us here.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.