The defendants moved to dismiss the case contending plaintiffs were obligated to make a demand on the company’s board to pursue the action in its own right, but the plaintiffs—a pension fund and an individual investor—argued a demand would have been futile because the directors consciously allowed the alleged misconduct to occur. U.S. District Judge Lewis A. Kaplan said, this case is a “replay of other similar cases where the plaintiff failed to allege with particularity any facts from which it could be inferred that particular directors knew or should have been on notice of alleged [misconduct], and any facts suggesting that the board knowingly allowed or participated in a violation of law.” He granted the motion to dismiss.
Plaintiffs Iron Workers Mid-South Pension Fund and Marilyn Clark filed separate derivative complaints in 2011, purportedly on behalf of the company. The cases were consolidated and transferred to the U.S. District Court for the Southern District of New York. The consolidated complaint alleges the defendants breached their duties to the company by pursuing illicit short-term profits through a standing instruction (SI) pricing scheme even though they knew, recklessly disregarded, or were grossly negligent in not knowing that those practices “were illegal, violated the company’s fiduciary duties, and/or exposed the company to financial and reputational risks.”
In SI trading, BNY Mellon automatically converted its customers’ funds from one currency to another as such needs arose, informing the customer of the executed price only after the fact. It described the service, among other things, as providing “best execution.” Kaplan noted that plaintiffs in this and other actions have alleged, however, that this term had an industry meaning inconsistent with the bank’s actual pricing practices. These practices, which were not disclosed to customers, were to price the trades at or near the least favorable interbank market rate of a given trading day. SI trading was highly profitable for BNY Mellon, as its margins well exceeded those of directly negotiated FOREX transactions.
According to the court opinion, the defendants maintained that demand (on the company’s board) is not excused because the allegations do not support an inference that the directors were aware of any fraudulent conduct. Kaplan pointed out that the court repeatedly has made clear that BNY Mellon’s pricing methodology and its failure to provide transparency, in and of themselves, did not constitute fraud and were not otherwise wrongful. Rather, it has sustained prior complaints only insofar as they have alleged that BNY Mellon actively misled its customers about the nature and quality of the services that it was providing—most notably, by stating that the service provided best execution.
Kaplan said the complaint fails to allege that the board, prior to 2011, was aware of facts indicating BNY Mellon was acting wrongfully—i.e., that they were aware that the bank was misrepresenting the nature and quality of its services to its customers. The complaint does not allege that any e-mails or reports, including any relating to similar State Street litigation, informed the board about how the company represented its services or indicated that these representations were inaccurate. In addition, there are no alleged "red flags" that could permit the conclusion that the board was grossly negligent in failing to learn how the company was representing its services before "deciding" not to act. Therefore, Kaplan concluded, the complaint does not allege sufficient facts with particularity to create a reasonable doubt that the board's inaction was a valid exercise of business judgment.
On the other side, plaintiffs contend that demand is excused because the outside directors face a "substantial likelihood of personal liability" due to their allegedly false and misleading statements. However, Kaplan found almost none of the statements upon which plaintiffs rely are alleged to have been made, reviewed, or approved by the outside directors.
The plaintiffs also allege the board has shown its hostility to the claims through a purported public campaign to discredit the allegations, therefore demand would be futile. Kaplan said this point merits no discussion because the complaint cites statements by management, and alleges no facts by which these statements may be attributed to the board.
Kaplan's opinion is here.
Also, in 2011, the Justice Department and New York's attorney general filed separate civil lawsuits against the Bank of New York Mellon Corp., alleging the bank defrauded or misled state and public pension funds, private companies, universities, and banks in a decade-long scheme of overcharging for foreign exchange (see "BNY Mellon Sued by U.S. and NY"). The civil case alleges violations of a federal law—wire and mail fraud—in claiming BNY Mellon defrauded federally insured banks. Kaplan noted that his court previously found the United States adequately pled, in certain respects, a claim that BNY Mellon and one of its employees committed mail and wire fraud.