What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing many times. That means shining the spotlight on the oftentimes, egregious frauds, committed by some of the most trusted financial institutions in the country. For example, goldman sachs manipulated stock prices in the early 2000s and for many years citigroup flat out stole money from credit card accounts of its most vulnerable clients. We've made videos on all three of those scandals and there's much more of this content to come, so make sure that you're subscribed to the channel in today's video we're going to take a look at a bank that we haven't covered yet, but is in fact one Of the biggest u.s investment banks outside of the top five we're talking about the recently settled case of bank of new york, mellon's 2 billion fraud involving foreign currency exchange in this scandal, bank of new york, mellon or bny advertised to large institutional clients, mainly made up Of pension funds and retirement managers false product offerings, they promised to offer currency exchange trading services on the billion dollar scale at best execution prices for both buys and sells, but instead they did the opposite, providing clients with worse execution prices on the scale that these clients Were operating, the fraud cost billions of dollars to retirement accounts across the world.

In fact, it's more than likely that you or someone you know held a retirement account that was negatively impacted by the fraud. If you invested in mutual funds run by fidelity in the 2000s or early 2010s, then you probably would be just a little bit richer right now, if bny hadn't carried out the fraud instead, some of that money probably ended up in the pockets of rich executives who Took home big bonuses for successfully implementing the fraud, so what exactly did dny do and how are the authorities eventually able to uncover it? Bny provides brokerage services to institutional clients like fidelity, in the same way that your stock brokerage app provides trade execution services to you. But on this level the transactions are not automated and in many instances large blocks of orders from institutional clients can be worth tens of millions of dollars. With orders of these sizes, prime brokers, like bny, try to find counterparties on the open market using their own client network, to execute the order at the best price possible.

Any losses due to liquidity issues in the market, given the large size of the orders, is called slippage and one of the biggest services that prime brokers advertise to potential clients is their ability to minimize slippage. That's exactly what bny did with their foreign currency exchange business. Starting in 2006. bny advertised on their global markets website that their foreign exchange execution service provided fx execution according to best execution standards.

They also claimed that quote. It is our goal to provide best execution for all foreign exchange executed in support of our clients transactions. We price foreign exchange at levels generally reflecting the inner bank market at the time the trade is executed by the foreign exchange desk. Invest execution encompasses a variety of services designed to maximize the proceeds of each trade.

Unquote, these claims convey to clients the best execution until using market making techniques and the bank's trading operations to obtain the best conversion rates for foreign exchange for clients. Obviously, this means getting the best price available for its clients, whether it be to buy or sell a foreign currency, but we will soon see that when they said their services are quote designed to maximize the proceeds of each trade, unquote, they weren't necessarily referring to their Clients, unfortunately, for his clients, these claims were simply lies the reality of how they actually filled client orders. Behind the scenes painted a very different picture. Throughout the day, bmy would receive numerous fx orders from various clients.

They would collect these orders over the course of the day and at the end of the day, match them in pairs according to which ones were ordering to buy versus, sell the same currencies. Then they would trade the currencies between the two clients in each pair. Even this, in and of itself would not be striving to give the best execution to clients, because when two clients, trade with each other on average, they can't get a better price than the midpoint of the spread. If b and y had instead tried to match each order with better prices on the open market, it might have been the case that good execution services would provide the buyer with a lower price to buy and the seller with a higher price to sell.

That would have been the optimal scenario for both clients, which bny was already precluding from the picture, but b and y went farther than that at the end of each day, they matched the pairs of client orders according to which clients were trying to buy and sell. The same fx pairs, then they listed all the actual trading prices for each fx pair that occurred throughout the trading day. They would then assign prices to the clients equal to one of the worst prices that was actually traded on the markets that day, the difference in prices for the buyer and seller would then go to bny's corporate accounts as profit, for example, if one client wants to Exchange one million dollars for euros and a second client wants to exchange 1 million euros for dollars and, throughout the day the exchange rate varied between 1.18 and 1.2, then b and y would match those two trades to trade with each other. However, for the client wanting to exchange dollars for euros b and y would only give them about one euro for each one dollar and twenty cents and for the client wanting to exchange euros into dollars.

Bny would only give them about one dollar and eighteen cents per each euro, so there would be about a two cent difference between the prices that the two clients would get. It was always set up, so that b and y would get to keep that spread. But it was also concealed by the fact that the prices that b y provided to clients was always technically within the range of prices that actually traded on the open markets. That day, in 2011, the u.s attorney's office and new york attorney general sued bny for these offenses saying that the bank had defrauded clients out of as much as 2 billion over the course of several years.

The new york attorney's office first started investigating the case after whistleblower at the bank filed a complaint against bny in response to the charges b and y vigorously denied all allegations. They said that the claims were flat out wrong. Unquote. They said that each morning their clients were given a range of prices for currency pairs that their orders might be executed at and they could choose to opt out of bny's execution services if they didn't like the range of prices, that bny was guaranteeing b and y.

Even went as far as to threaten the jobs of thousands of their own employees, saying that the charges were not in the interest of the jobs that they provided to new york workers. A spokesperson rejected the possibility of bny settling with the allegations saying quote. While we recognize that capitulating to the office's demands might avoid some nasty headlines, we refuse to be coerced into admitting to and paying for wrongdoing that does not exist unquote, but then the sec got involved and was able to provide evidence using sophisticated data, analysis tools and Trading data on bny, the us attorney's office also continued investigating the fraud they eventually named a specific person within bny david nichols who admitted to overseeing much of the fraud as a managing director at the bank in 2015. They were eventually able to reach a settlement with bny over the fraud for a massive 714 million dollars in the world of financial settlements.

This penalty of nearly three-quarters of a billion dollars is one of the biggest ever. The bulk of the penalty went to compensating the victims of the fraud for their losses in the bank's response to the settlement. They said that they only admitted to the statement of facts brought forth by the attorney's office in the state of new york. They did not admit to any wrongdoing, but it's pretty clear that what they did was fraud.

They told clients that they would execute their trades at the best prices available on the market, whether it be to buy or to sell. Instead, the bank acted as a market maker front running their own clients to skim off hundreds of millions of dollars of profits. That's actually quite similar to what retail stock brokerages like robinhood do. In tandem with market makers like citadel to extract money from customer orders in the form of bid ask spreads, the difference here was that it was all perpetrated by one single institution explicitly giving their clients the worst order execution when they promised them good order execution.

This settlement also highlights the need for all major settlements to have at least one person to act as a scapegoat. Bny did not admit to any wrongdoing in 2011, when the case was first brought. It was not until the attorney's office named one managing director within the company as mastermind behind the fraud. That bny was willing to admit any allegations.

The bank was forced to terminate david nicholls employment at the firm which anyone would agree is as easy for a bank like bny as flipping a switch, but by doing so and having his name in all the press, releases bny is able to shift blame onto one Bad apple, rather than a systemic problem within the finance industry or the bank itself, based on the history of major scandals by bny and its wall street peers. Anyone can clearly see that there is a much bigger problem than just david nichols alone. But it's a problem that our financial regulators just seem unable to stamp out, and it doesn't seem likely that that reality is going to change anytime soon. Alright, guys that wraps it up for this video.

If you enjoyed the content, make sure to like subscribe and share this video also leave a comment saying what you think about bank of new york melon and their foreign currency fraud in the meantime. Thank you so much for watching and we'll see in the next video wall street millennial signing out.