According to a statement released late Thursday by state and federal law enforcement officials, the Bank of New York Mellon has agreed to pay $714 million to settle claims that it lied to and cheated government pension funds and other investors for almost 11 years. The settlement is a part of a deal where the bank must terminate the employees involved in fraud and make more complete public disclosures of its forex operations.

Bank of New York Mellon

Statement from federal and state prosecutors

The United States attorney in Manhattan Bharara noted in a statement that clients “trusted the bank to be honest about the financial services it was providing and to deal with them fairly.” But instead, he said, the bank “and its executives, motivated by outsized profits and bonuses, breached this trust.”

The Attorney General of New York Eric T. Schneiderman commented: “Investors count on financial institutions to tell them the truth about how their investments are being managed.” He added, “Today’s settlement shows that institutions and individuals responsible for defrauding investors will be held accountable and face serious consequences for their wrongdoing.”

Details on the Bank of New York Mellon fraud case

Prosecutors alleged the bank told clients that they would get the best rate when executing a currency trade. However, the bank did just the opposite: Bank of New York Mellon provided clients “prices that were at or near the worst interbank rates,” allowing the bank to make high profits.

New York City pension funds and private investors were both defrauded, according to the allegations. Pension fund investors included teachers and police officers, and the private funds were from organizations and businesses such as Duke University and the Walt Disney Company.

Of note, the $714 million settlement is less than half of the $2 billion in fraudulent profits the New York State attorney general’s office claimed in its filings. Moreover, the admissions by the Bank of new York Mellon were notably narrower than the charges prosecutors first brought back in 2011.

Analysts from RBC note:

Due to the one-time nature of today’s actions, core net income will not be affected by the settlement.

UBS analysts believe that the actions could help the activists looking for a shake up at the company. They note in a report out today:

Pressure from activists begins to mount

Recently we have seen each of the activists make noise around Bank of NY in very different ways. Marcato released an extensive deck calling for management changes at the firm and highlighting a few potential recommendations. While we certainly found some of the analysis interesting (the points on staffing levels and the need for lay-offs got our attention) others were odd (should Bank of NY really be a late entrant into the ETF space?) Separately, changes were made to management comp in this year’s proxy, putting greater emphasis on operating EPS growth and tying more senior management comp to reaching their LT targets (vs annual targets). Given, the other activist in BK, Trian, is on the board now, it is our sense they may have played a hand in these changes.