Bank of New York Mellon Corporation False Claims Act Foreign Exchange Litigation v. Bank of New York Mellon Corporation
MEMORANDUM OPINION re: (108 in 1:12-cv-03064-LAK) MOTION to Dismiss Los Angeles Department of Water & Power Retirement Plans and FX Analytics' Fourth Amended Complaints filed by The Bank of New York Mellon, Bank of New York Mell on Trust Company, N.A., (4 in 1:12-cv-08990-LAK) MOTION to Dismiss filed by Bank of New York Mellon Corporation, Bank of New York Mellon Trust Company, N.A. For the foregoing reasons, defendants' motions to dismiss [12 MD 2335 DI 167, 12 Civ. 8990 DI 4; 12 MD 2335 DI 213, 12 Civ. 3064 DI 108] are granted in all respects as to BNY Mellon Corp. and granted in all respects as to the other defendants save, with respect to the other defendants, that they are denied insofar as LACER A and LADWP assert the claims sustained in SEPTAthat is, claims for (1) breach of contract premised on defendants failure to provide "best execution," and (2) breach of fiduciary duty premised on certain alleged misrepresentations and nondisclosures. LACERA, LADWP, and relator may move for leave to amend provided that any such motion shall be filed no later than June 15, 2014. SO ORDERED. (Signed by Judge Lewis A. Kaplan on 5/1/2014) (ajs)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
BANK OF NEW YORK MELLON CORP.
FOREX TRANSACTIONS LITIGATION
12 MD 2335 (LAK)
This document relates to:
Los Angeles Cty. Emp. Ret. Ass’n ex rel. FX Analytics v.
The Bank of New York Mellon Corp., 12 Civ. 8990 (LAK)
In re Bank of New York Mellon Corp. False Claims Act
Foreign Exch. Litig., 12 Civ. 3064 (LAK).
Steven N. Williams
Adam J. Zapala
Eric J. Buescher
Gene W. Kim
COTCHETT, PITRE & MCCARTHY LLP
Carmen A. Trutanich
Alan L. Manning
OFFICE OF THE LOS ANGELES CITY ATTORNEY
Attorneys for Plaintiffs Los Angeles Department of Water
and Power Retirement Plan and Los Angeles County
Employee Retirement Association
Richard H. Heimann
Lexi J. Hazam
Robert L. Lieff
LIEFF, CABRASER, HEIMANN & BERNSTEIN, LLP
Philip R. Michael
MICHAEL LAW GROUP
Michael P. Thornton
Michael A. Lesser
Evan R. Hoffman
THORNTON & NAUMES LLP
Attorneys for Plaintiff/Relator
Reid M. Figel
Rebecca A. Beynon
David L. Schwarz
Derek T. Ho
Gregory G. Rapawy
Joshua D. Branson
KELLOGG, HUBER, HANSEN, TODD, EVANS & FIGEL,
Attorneys for Defendants
LEWIS A. KAPLAN, District Judge.
This is yet the next chapter in the litigation regarding the standing instruction foreign
exchange (“FX”) trading service provided by Bank of New York Mellon (“BNY Mellon”)1 to its
custodial customers. In Southeast Pennsylvania Transportation Authority v. Bank of New York
Mellon Corp. (“SEPTA”),2 this Court sustained a BNY Mellon customer’s claim of breach of
contract and, to a limited extent, its claim of breach of fiduciary duty. In United States v. Bank of
New York Mellon (“DOJ”),3 it sustained in part the federal government’s claims that BNY Mellon
committed mail and wire fraud and is liable for civil penalties under Section 951a of the Financial
“BNY Mellon” refers collectively to Bank of New York Mellon and its various
predecessors and affiliates.
921 F. Supp. 2d 56 (S.D.N.Y. 2013).
941 F. Supp. 2d 438 (S.D.N.Y. 2013).
Institutions Reform, Recovery and Enforcement Act of 1989, commonly known as FIRREA.4
Here, a relator brings claims on behalf of four California governmental entities
against BNY Mellon, its affiliates, and unnamed individuals under the California False Claims Act
(“CFCA”). Two of these entities have intervened to pursue their own claims. The matters are
before the Court on defendants’ motions to dismiss the operative complaints.
Relator FX Analytics first filed a complaint against defendants under seal in Alameda
County Superior Court in October 2009. It asserted CFCA claims on behalf of a number of
California governmental entities including, inter alia, Los Angeles County Retirement Association
(“LACERA”), Los Angeles Department of Water & Power Employees’ Retirement Plan
(“LADWP”), the Santa Barbara County Employees’ Retirement System Fund (“SBCERS”), and the
Tulare County Employees’ Retirement Association Fund (“TCERS”).5 LACERA, LADWP, and
other entities not relevant here subsequently intervened in the action and asserted claims under the
CFCA, the California Business and Professions Code, and the common law. In November 2011,
defendants removed the case to the United States District Court for the Northern District of
California and later moved to dismiss.
In March 2012, the California district court held that none of the CFCA claims
12 U.S.C. § 1833a.
The complaint included several other entities who are no longer part of the case and need
not be discussed further here. See In re Bank of N.Y. Mellon Corp. False Claims Act
Foreign Exch. Litig. (“In re BNYM”), 851 F. Supp. 2d 1190, 1193 (N.D. Cal. 2012).
stated a legally sufficient claim, upheld the legal sufficiency of all of the non-CFCA claims except
that for unjust enrichment, and held that the venue was improper as to LACERA’s complaint in
consequence of a forum selection clause in the relevant custody agreement.6 The court permitted
plaintiffs to seek leave to amend and ruled that the dismissal of LACERA’s claims was without
prejudice to their being re-filed in the proper venue. In April 2012, the case was transferred to this
Court by the Judicial Panel on Multidistrict Litigation (“JPML”). Both relator and LADWP
eventually filed Fourth Amended Complaints. Defendants moved to dismiss both complaints in
Meanwhile, pursuant to the March 2012 opinion, LACERA re-filed its claims in a
new complaint in the Central District of California in September 2012. That case too was
transferred to this Court by the JPML, and defendants moved to dismiss in December 2012.
Following filing of the motions to dismiss in December 2012, both LACERA and
LADWP filed amended complaints, LACERA’s first and LADWP’s fifth. As previously indicated,
the Court treats the December 2012 motions as being addressed to the subsequent amended
complaints in the interest of judicial economy.
LACERA, LADWP, SBCERS, and TCERS each had a custodial agreement with
BNY Mellon7 whereby BNY Mellon agreed to hold various assets, including cash and securities,
See generally id.
LADWP and SBCERS entered into these arrangements in 2004, TCERS in 2003, and
LACERA in 1994. See Relator Cpt [DI 119, Ex. A] ¶ 124; LADWP Cpt [DI 257, Ex. A] ¶
123; LACERA Cpt [DI 259, Ex. A] ¶ 122.
on each’s behalf. BNY Mellon expressly acknowledged in its agreements with LADWP and
LACERA that it had assumed fiduciary obligations, at least in certain respects.8
As part of their custodial relationships, each customer regularly received monthly
invoices for payment in accordance with a particular fee schedule.9 The fee schedules varied by
client.10 In each case, however, the fee schedule specified that the client was responsible for certain
“custodial fees”—fees that were fixed or that varied with the value of the assets BNY Mellon held
on the client’s behalf.11 Moreover, the fee schedule in each case specified certain “transaction
fees”—fees that were tied to individual transactions conducted by the client with respect to its assets
in BNY Mellon custody.12
From time to time, the clients wished to engage in FX trading, e.g., to convert foreign
currency dividends into U.S. dollars. Each used BNY Mellon’s standing instruction service to do
so. The Court assumes familiarity with its prior opinions that lay out the details of this program.13
As the Court recently summarized,
See LADWP Branson Decl. [DI 215], Ex. 1 at 9; LACERA Branson Decl. [DI 169], Ex. 1
LACERA Cpt ¶ 132; LADWP Cpt ¶ 128; Relator Cpt ¶¶ 126-27.
Moreover, the fee schedule for each client appears to have been subject to amendment over
time. See, e.g., Ex. 6, 7, Branson Decl. (depicting revisions in LACERA’s fee schedule).
See, e.g., LACERA Branson Decl., Ex. 6. For brevity and convenience, the Court will at
times omit parallel citations relating to each fund. Except where otherwise indicated, the
funds’ pleadings are consistent with each other.
See, e.g., id.
See DOJ, 941 F. Supp. 2d at 444-49; SEPTA, 921 F. Supp. 2d at 62–70.
“In standing instruction (‘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.’ 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 FX transactions.”14
LACERA and LADWP allege that they or their investment managers signed certain
FX procedure forms relating to the program.15 One hyperlink on this form went to an FX policies
and procedures document, and another went to the Standing Instructions Page, which contained the
representation that the program provided best execution. These items are discussed in more detail
Each client received monthly transaction statements relating to standing instruction
transactions that indicated the prices at which their currencies had been converted during the prior
month.17 These statements contained no requests for action or payment by the client, as the client’s
account already had been debited or credited by BNY Mellon in accordance with the conversion rate
relevant to the given trade.18 But plaintiffs’ contracts did afford them a fixed period in which they
In re Bank of New York Mellon Corp. Forex Trans. Litig., 12 MD 2335 (LAK), 11 Civ.
8471 (LAK), 2013 WL 3358028 at *1 (S.D.N.Y. July 2, 2013) (footnotes omitted). The
allegations of the instant complaints are consistent with this summary.
LACERA Cpt ¶¶ 158–64; LADWP Cpt ¶¶ 132–38.
921 F. Supp. 2d at 64–69.
See, e.g., LACERA Cpt ¶ 195.
See, e.g., id. ¶ 194.
could object to any transaction listed on the report.19
Aside from the FX conversion rates at which BNY Mellon executed the trades,
certain clients allege that they paid separate and additional transaction fees for each standing
instruction trade and that these transaction fees were billed on the custodial invoices discussed
above. In particular, LACERA alleges that it was charged a fee ranging from $12 to $75 for each
standing instruction trade.20
Similarly, the relator alleges that SBCERS and TCERS paid
“transaction fees for custodial standing instruction FX trades as well as 3rd party FX transactions.”21
LADWP alleges that BNY Mellon represented “that its Standing Instruction service was ‘free of
LADWP, LACERA, and relator (on behalf of TCERS and SBCERS) each brings
claims under the CFCA. LADWP and LACERA bring claims also of breach of contract, breach of
fiduciary duty, fraud by concealment, and violation of California Business and Professional Code
LACERA Cpt ¶ 196; LADWP Cpt ¶ 140; Relator Cpt ¶ 142.
LACERA Cpt ¶ 134.
Relator Cpt ¶¶ 127, 130.
LADWP Cpt ¶ 182.
The California district court (Alsup, J.) denied defendants’ motion to dismiss as to
LADWP’s non-CFCA claims, except that for unjust enrichment, but its decision ultimately
dismissed LACERA’s claims on venue grounds.
Breach of Contract
LACERA and LADWP contend that defendants are liable for breach of contract on
a number of grounds, including their alleged failures to (1) provide best execution, (2) net trades,
(3) keep proper records, (4) provide competitive rates, (5) exercise reasonable care in the execution
of duties, and (6) disclose the standing instruction pricing scheme.24
The Court denies defendants’ motions insofar as plaintiffs advance the theory of
breach of contract this Court sustained in SEPTA—that FX procedure forms relating to standing
instruction incorporated a contractual best execution obligation that defendants allegedly failed to
meet.25 The Court, however, grants the motion as to all other theories of breach of contract.
Plaintiffs allege that defendants have breached a contractual obligation to net their
trades based on a representation on defendants’ website that they would aggregate and net trades
“based on guidelines tailored to client needs.”26 Defendants contend that this representation did not
promise netting but simply made it available to clients who negotiated customized netting
“[T]raditional principles of law of the case counsel against the transferee court reevaluating
the rulings of the transferor court.” Chrysler Credit Corp. v. Country Chrysler, Inc., 928
F.2d 1509, 1516 (10th Cir. 1991). Nevertheless, the law of the case goes to the transferee
court’s discretion, not its power. Id. The plaintiffs’ non-CFCA claims are closely
interrelated with the amended CFCA claims that Judge Alsup did not consider and that now
are before this Court. In the circumstances of this case, the Court reluctantly exercises its
discretion to consider defendants’ motion to dismiss LADWP’s non-CFCA claims de novo
notwithstanding the traditional rule.
See, e.g., LACERA Cpt ¶¶ 222–23.
SEPTA, 921 F. Supp. 2d at 70–78. Defendants effectively concede that the recent
amendments by LACERA and LADWP adequately allege the breach of contract theory
sustained in SEPTA. DI 263.
See, e.g., LACERA Cpt ¶ 56 (emphasis omitted); see also DOJ, 941 F. Supp. 2d at 446
(explaining the concept of netting and BNY Mellon’s alleged representations).
arrangements. But, as this Court observed in DOJ, that understanding of the statement cannot be
determined as a matter of law at this stage.27 Nevertheless, the complaints fail to allege that this
representation on the website formed part of a contract among the parties. This theory therefore is
Plaintiffs allege also that the contracts obliged defendants “to provide extremely
competitive market driven rates” and that defendants asserted that the competitiveness of their rates
was ensured through a report showing rates falling outside of the daily range.28 This theory too fails.
The Court has accepted the sufficiency of plaintiffs’ “best execution” theory because
plaintiffs plausibly have alleged that the term has an industry meaning inconsistent with defendants’
pricing practices.29 Plaintiffs allege nothing comparable with regard to “competitive rates.”
Plaintiffs do not allege that BNY Mellon’s pricing was uncompetitive in the universe of similar
standing instruction products. Moreover, the Court questions whether defendants’ alleged pledge
to “strive” to provide competitive rates could be an enforceable contractual promise.30
Nor may plaintiffs proceed on a theory that defendants’ pricing breached a
contractual standard of reasonable care. To be sure, plaintiffs allege that defendants assumed a
contractual duty to discharge their duties “with the competence, care, skill, prudence, and diligence
Id. at 478-79.
LACERA Cpt ¶ 123. The “daily range” appears to refer to the range between the lowest
and highest interbank rates that the currency traded that day.
SEPTA, 921 F. Supp. 2d at 76–77; DOJ, 941 F. Supp. 2d at 465-67.
See Bustamante v. Intuit, Inc., 141 Cal. App. 4th 199, 209 (2006) (“To be enforceable, a
promise must be definite enough that a court can determine the scope of the duty, and the
limits of performance must be sufficiently defined to provide a rational basis for the
assessment of damages.” (internal quotation marks and alterations omitted)).
prevailing in the custodial industry.”31 But, as defendants point out, this is a duty of skill, distinct
from a duty of loyalty.32 Plaintiffs do not allege any facts suggestive of any failure on defendants’
part to perform in a skillful, careful, or diligent manner.
Plaintiffs assert also a breach of the implied covenant of good faith and fair dealing.
But as the Court explained in SEPTA, that contention is inapposite in this context.33
Breach of Fiduciary Duty
LACERA and LADWP allege that their custodial contracts created a fiduciary
relationship and that defendants breached their fiduciary duties. The Court considers the two alleged
breaches of breach of fiduciary duty they advance.
Fiduciary Obligation to Provide Best Prices
First, SEPTA alleged that BNY Mellon was acting in a fiduciary capacity when
executing standing instruction trades. It contended that the bank therefore had a freestanding
obligation to provide the best pricing it could, independent of any best execution covenant or
representation. This Court disagreed, concluding that SEPTA’s complaint in substance alleged that
BNY Mellon acted as principal, not as a fiduciary, when executing standing instruction trades for
See, e.g., LACERA Cpt ¶ 28.
See Michel v. Palos Verdes Network Group, Inc., 156 Cal. App. 4th 756, 762 (2007)
921 F. Supp. 2d at 78–80. Plaintiffs point to no California law to the contrary.
LADWP’s complaint alleges little to warrant a different conclusion. It quotes a part
of its custodial contract indicating that BNY Mellon “acknowledge[d] that it is a Plan fiduciary with
respect to the duties undertaken pursuant to this Agreement.”34 It alleges that BNY Mellon
represented during the request for proposal (“RFP”) process that, as custodian, it would have “a
fiduciary responsibility to ensure that all of your assets are properly held in safekeeping and that all
assets are accurately reported on our accounting system.”35 The RFP response, which allegedly was
incorporated into the contract, said also that BNY Mellon was “able to . . . provide foreign exchange
services” and explained those services in greater detail.36 But these allegations are insufficient. An
obligation to keep safe and report assets accurately does not give rise to a best pricing obligation.
Moreover, the complaint’s allegation that FX trading was provided as a “service” did not make it
one of its BNY Mellon’s “duties” as custodian of LADWP’s assets under the custodial agreement.
LACERA’s complaint is similarly deficient. It alleges that the contract defined
“Custodian” as BNY Mellon “in its fiduciary capacity as the entity which is obligated to preserve,
control and safekeep any Property” entrusted to it by LACERA.37 It further alleges that BNY
Mellon “acknowledge[d]” in the contract “that this Agreement place[d] it in a fiduciary relationship
with LACERA.”38 It alleges that BNY Mellon “agree[d] to provide the custodial, accounting, and
LADWP Cpt ¶ 27 (emphasis added).
Id. ¶ 124(a).
Id. ¶¶ 123, 124(b).
LACERA Cpt ¶ 28(b).
Id. ¶ 28(c).
reporting services” to LACERA outlined in a document called the “Statement of Work.”39 It then
quotes from a portion of the Statement of Work that obligated BNY Mellon to “make payment of
funds . . . for the purchase or sale or [sic] foreign exchange of foreign exchange contracts for the
Account, including transactions executed with or through [BNY Mellon] or its Agents.”40 But these
allegations also fail. That BNY Mellon was obligated to make payments to facilitate trading did not
give rise to a fiduciary obligation to provide the best possible trading prices.
Perhaps recognizing these deficiencies, plaintiffs rely almost entirely on supposed
contractual language that appears nowhere within the four corners of the complaints. LADWP relies
on language said to obligate BNY Mellon to “[t]ake actions necessary to settle transactions in . . .
foreign exchange or foreign exchange contracts.”41 LACERA relies on quotations from BNY
Mellon’s RFP response (which it alleges also was incorporated into the contract) and a document
entitled “A Guide to Trading Around the World,” which allegedly was an appendix to the
“Statement of Work” of the original contract.42
While the Court has discretion to consider language from documents such as these
– the documents plainly are relied on by plaintiffs and are integral to the complaint – it declines to
do so.43 It is plaintiffs’ responsibility to allege facts sufficient to make out plausible claims for
Id. ¶ 129(a).
Id. ¶ 129(b)-(c).
LADWP Branson Decl., Ex. 1 § 6(c).
LACERA Opp. [DI 170] at 4–5; see LACERA Branson Decl., Ex. 1 at A-3.
Matson v. Bd. of Education of City Sch. Dist. of N.Y., 631 F.3d 57, 62 (2d Cir. 2011) (“On
a motion to dismiss, the court may consider any written instrument attached to the complaint
relief. Plaintiffs did not quote this language in or attach the documents said to contain it to the
complaints. This failure resulted in scattershot and undeveloped briefing, as defendants did not have
notice of these factual allegations underlying plaintiffs’ claim. This problem is particularly acute
with respect to “A Guide to Trading Around the World,” as LACERA and defendants each argue
about what version of the document allegedly was incorporated into the contract and when.
Thus, plaintiffs’ breach of fiduciary duty claim, insofar as it is premised on an alleged
freestanding fiduciary obligation of BNY Mellon to provide the best possible pricing, is dismissed.
Alleged Misrepresentations and Nondisclosure
Despite dismissing the claim that BNY Mellon acted in a fiduciary capacity while
executing SEPTA’s standing instruction trades, the Court permitted SEPTA to pursue a claim for
breach of fiduciary duty based on assertions that BNY Mellon misleadingly described the program
as providing “best execution”44 and failed adequately to disclose “whether the standing instruction
service was part of BNY Mellon’s fiduciary responsibilities.”45 Plaintiffs have indicated that they
as an exhibit or incorporated in the complaint by reference, as well as documents upon
which the complaint relies and which are integral to the complaint.” (alterations omitted and
Of course, even if the Court were to consider the language LADWP quotes, LADWP would
have to address SEPTA’s conclusion that it would be “quite a leap” to go from a fiduciary
settlement obligation to a fiduciary execution obligation. 921 F. Supp. 2d at 82–83.
921 F. Supp. 2d at 87. The Court permitted such a claim in the alternative to the claim that
best execution was a contractual obligation.
At least one court has reached the same result following SEPTA. See People ex rel.
Schneiderman v. Bank of New York Mellon Corp., No. 114735/09, 2013 WL 4516209, at
*22 (N.Y. Sup. Ct. Aug. 5, 2013) (concluding that “a similar claim is potentially viable”
under New York law and citing several cases).
seek to advance the same theory.
Defendants have not provided a reason to rule differently here. They do not argue
that LADWP or LACERA’s contracts warrant a different conclusion—as in SEPTA, the Court
concludes that standing instruction was closely related to BNY Mellon’s undisputed fiduciary duties,
triggering a need for BNY Mellon not to mislead its clients when it sought further profit from the
relationship. Defendants allude briefly to the fact that SEPTA was decided as a matter of
Pennsylvania law, whereas California law governs the present case.46 But they point to no California
law inconsistent with the basic principles on which SEPTA relied – that “where a fiduciary seeks to
profit by acting in a principal capacity in matters sufficiently related to the subject of its fiduciary
duties, the fiduciary may do so only if, at a minimum, it fully and fairly discloses the nature of the
relationship and its duties.”47
Indeed, if anything, California appears to recognize the same basic principles that
supported SEPTA’s position under Pennsylvania law. In Van de Kamp v. Bank of America,48 the
California Court of Appeal concluded that a custodial bank’s handling of cash proceeds after a sale
of securities did not violate any fiduciary obligations. It reasoned that “[t]he bank’s duty as agent
is limited to the scope of the agency set forth in the parties’ agreement” and the agreement indicated
Status Report [DI 234] at 37.
SEPTA, 921 F. Supp. 2d at 86. In their motion to dismiss LADWP’s complaint, defendants
cite Petersen v. Secs. Settlement Corp., 226 Cal. App. 3d 1445, 1456 (1991), and Brown v.
California Pension Adm’rs & Consultants, Inc., 45 Cal. App. 4th 333, 348 (1996). But
those cases stands only for the uncontroversial principle that fiduciaries performing
ministerial functions have no obligation to advise against imprudent investments. They do
not say that such fiduciaries may seek to profit as principals after providing misleading
disclosures about a program closely connected to their fiduciary obligations.
204 Cal. App. 3d 819 (1988).
that the agency terminated upon the sale of securities.49 At the same time, the court went on to state:
“The question remains, however, whether defendant breached any duty of disclosure owed to the
principals of the custodial agency accounts. As previously discussed, the agent must disclose
whether it acts on its own account or adversely to the principal in a transaction connected with its
agency.”50 Thus, the court recognized that an agent may have a duty of disclosure with regard to
matters “connected with its agency” even when the agency relationship does not formally govern
the transaction in question.51 Other California authorities confirm the point.52
The Court cannot conclude as a matter of law that the duty of disclosure has been
satisfied here.53 The motion therefore is denied as to claims of breach of fiduciary duty based on
Id. at 860-61.
Id. at 861 (emphasis added).
The court ultimately concluded that no such disclosure was required because the transaction
occurred only after termination of the agency relationship and thus was not “connected with
its agency.” But that is not this case.
See also Twomey v. Mitchum, Jones & Templeton, Inc., 262 Cal. App. 2d 690, 715 (1968)
(“The fact that defendants made more in trading as principal and that they did so trade with
the plaintiff, without full disclosure, tends to show an indifference to the fiduciary duty
owed to a client whose funds they controlled.”); Cleveland v. Johnson, 209 Cal. App. 4th
1315, 1338 (2012) (noting that fiduciary “can take no advantage from his acts relating to
the interest of the other party without the latter’s knowledge or consent”); Jorgenson v.
Beach ‘N’ Bay Realty, Inc., 125 Cal. App. 3d 155, 162 (1981) (“[W]hen the acts of an agent
have been questioned by his principal and the fiduciary relationship has been established,
the burden is cast upon the agent to prove that he acted with the utmost good faith toward
his principal and that he ma[d]e a full disclosure prior to the transaction of all the facts
relating to the transaction under attack.” (internal quotation marks omitted)).
In SEPTA, this Court concluded that the “mere reference to ‘principal basis’ in a document
incorporated by” an FX procedure form did not foreclose a plausible claim that the
disclosures were insufficient. 921 F. Supp. 2d at 87. SEPTA specifically had not disputed
that the document containing the “principal basis” disclosure governed its trades. Id. at 83.
In this case, plaintiffs allege that “[a]t some point” their investment managers were required
alleged misrepresentations and nondisclosures.
LACERA, LADWP, and relator (on behalf of TCERS and SBCERS) bring several
claims under the CFCA, which generally proscribes, among other things, the submission of false
claims for money, property, or services, to the government. It has been designed “to prevent fraud
on the public treasury”54 and “should be given the broadest possible construction consistent with that
purpose.”55 As it “is patterned on similar federal legislation [the federal False Claims Act
(“FCA”)][, . . . ] it is appropriate to look to precedent construing the equivalent federal act.”56
The Relevant Version of the CFCA
As an initial matter, it is necessary to determine which of two versions of the CFCA
California substantially broadened potential liability under CFCA, effective in
January 2010. Those changes generally conformed the CFCA to changes to the FCA in the 2009
to acknowledge receiving the FX policies and procedures that apparently contained this
disclosure. Further, they conclusorily allege that this document did not affect defendants’
State v. Altus Finance, S.A., 36 Cal. 4th 1284, 1296 (2005) (internal quotation marks
San Francisco Unified School Dist. ex rel. Contreras v. Laidlaw Transit, Inc., 182 Cal. App.
4th 438, 446 (2010) (internal quotation marks omitted).
Altus Finance, 36 Cal. 4th at 1299 (internal quotation marks omitted).
Fraud Enforcement and Recovery Act (“FERA”).57 Defendants argue that the recent revisions do
not apply here because the conduct at issue occurred before their January 1, 2010 effective date.58
Although plaintiffs’59 complaints often quote from the 2010 version of the CFCA,
neither opposition brief disputes defendants’ contention that the prior CFCA version governs. The
Court therefore assumes, for purposes of this motion, that the recent revisions to the CFCA do not
Section 12651(a)(1) makes it unlawful to “[k]nowingly present or cause to be
presented to an officer or employee of the state or of any political subdivision thereof, a false claim
for payment or approval.”60 Plaintiffs contend that defendants are liable for presenting two different
kinds of false claims: (1) monthly transaction statements and (2) monthly custodial invoices.
Judge Alsup rejected the transaction statement theory on the ground that those
P.L. 111-21, 123 Stat. 1617 (2009).
LADWP Def. Mem. [DI 214] at 22. Defendants expressly make this argument only with
respect to liability under one particular subdivision of the CFCA, Section 12651(a)(4). But
the Court is aware of no reason to conclude that the applicability of the recent amendments
would vary by subdivision.
For convenience, throughout this section, the court refers to “plaintiffs” as including relator.
CAL. GOV’T CODE § 12651(a)(1) (2009).
statements did not constitute “claims” under the CFCA.61 Two other state courts have reached the
same conclusion with regard to parallel state false claims statutes.62 This Court agrees.63
The CFCA defines a “claim” to include any “request or demand for money, property,
or services” from the state or political subdivision.64 But the statements of transactions cannot
reasonably be construed as requests or demands. They were accounting statements of past
transactions that did not request or demand anything.
Plaintiffs contend principally that the statements functionally were requests or
demands because plaintiffs had the right to object to the transactions and not remain liable for the
trades.65 They correctly note that the CFCA was designed “to prevent fraud on the public treasury”66
and “should be given the broadest possible construction consistent with that purpose.”67 But even
broad construction does not permit a court to ignore the text of the statute.68 The Court cannot
In re BNYM, 851 F. Supp. 2d at 1196–97.
Schneiderman, 2013 WL 4516209 at *25–26; Commonwealth ex rel. FX Analytics v. Bank
of New York Mellon Corp., 84 Va. Cir. 473 (2012).
The Court thus need not reach defendants’ other contentions for dismissal of this theory.
CAL. GOV’T CODE § 12650(b)(1) (2009). The definition was amended effective January 1,
2010, but in no way that either party contends is meaningful here.
LACERA Opp. 26; LADWP Opp. 26.
Altus Finance, 36 Cal. 4th at 1296.
Contreras, 182 Cal. App. 4th at 446 (internal quotation marks omitted).
In re C.H., 53 Cal. 4th 94, 100 (2011) (“If the statute’s text evinces an unmistakable plain
meaning, we need go no further” (internal quotation marks omitted)); cf. Hedges v. Obama,
724 F.3d 170, 189 (2d Cir. 2013), cert. denied, 133 S. Ct.
, No. 13-758, 2014 WL
stretch defendants’ providing plaintiffs a right to object to a transaction as a “request or demand”
for money, property, or services.
The structure of the CFCA is enlightening as well. In Section 12651(a)(4), the
legislature specifically contemplated the possibility that a defendant might be liable—even in the
absence of a “claim”—when it “[h]as possession, custody, or control of public property or money”
and fails to deliver all of that property.69 Moreover, in Section 12651(a)(7), known as the reverse
false claims provision, the CFCA permits liability in certain circumstances where a defendant
unlawfully conceals, avoids, or decreases an obligation to provide money or property to the
government. Thus, the legislature was well aware that liability may be appropriate even in the
absence of any request or demand. But the fact that it provided for liability in certain of these
circumstances under Sections 12651(a)(4) and (7) serves to confirm that no liability was intended
under Section 12651(a)(1) in the absence of a claim.70
In so holding, the Court does not require plaintiffs to allege an explicit request or
demand. Surely Sections 12651(a)(1) and (2) do not require a formal invoice for liability to attach;
1659886 (U.S. filed Apr. 28, 2014); United States v. Coppola, 671 F.3d 220, 240 (2d Cir.
Plaintiffs’ reliance on outdated federal authorities warrants no different conclusion. In
United States v. McLeod, 721 F.2d 282 (9th Cir. 1983), and Scolnick v. United States, 331
F.2d 598 (1st Cir. 1964), the courts concluded that knowingly cashing a mistakenly issued
check constituted a false claim. These decisions were issued prior to 1986, when the federal
FCA first defined a claim to be a “request or demand” and first introduced the reverse false
claims provision. See 31 U.S.C. § 3729(b)(3) (recently amended version of FCA making
clear that “obligation” for purpose of reverse false claims liability included duty arising
from retention of overpayment); see also Schneiderman, 2013 WL 4516209, at *26
(reasoning that endorsement of check would constitute the requisite claim in such
conduct amounting to an implicit request may be sufficient.71 But that is not this case. At the time
these statements were issued, the accounts already had been debited and there was nothing further
Finally, plaintiffs argue that the statements were implicit requests because “they
induced [plaintiffs] to continue paying out money through the Standing Instruction service.”72 The
point merits little discussion. Any behavior on plaintiffs’ part the statements may have induced is
irrelevant to whether the statements themselves were implicit or explicit requests or demands.
The Court thus turns to plaintiffs’ new theory, which has not been addressed by any
other court—that their monthly custodial invoices constituted “false claims” under the CFCA.73 In
moving to dismiss the Section 12651(a)(1) count as to this theory, defendants do not dispute that
these invoices constituted claims. Rather, they challenge whether (1) the alleged false claims have
been alleged with particularity as required by Fed. R. Civ. P. 9(b), (2) plaintiffs sufficiently have
alleged that the invoices were false, and (3) plaintiffs adequately have alleged scienter.
Plaintiffs advance four separate theories as to why the custodial invoices were false.
See United States ex rel. Schwedt v. Planning Research Corp., 59 F.3d 196, 199 (D.C. Cir.
1995) (addressing circumstance under federal FCA in which defendant did not submit an
invoice but “its goal of receiving payment was implicit in the submission of the goods”).
LADWP Opp. at 26; LACERA Opp. at 26.
None of the prior courts considering whether defendants are liable under various state false
claims acts for their standing instruction service has been presented with this theory of
False on Their Face
Plaintiffs contend first that the custodial invoices were false on their face because
they allegedly “represented to Plaintiff[s] a flat-fee for [BNY Mellon’s] services but failed to
disclose the significant amount of additional moneys Plaintiff[s] paid over to the Bank through
Standing Instruction FX services.”74 Furthermore, plaintiffs allege that the invoices were false on
their face “because they led [plaintiffs] to believe that these were the complete and total amounts
billed to Plaintiff.”75
Under Rule 9(b), “a party must state with particularity the circumstances constituting
fraud.”76 This requires a plaintiff to “adequately specify the statements it claims were false or
misleading, give particulars as to the respect in which the plaintiff contends the statements were
fraudulent, state when and where the statements were made, and identify those responsible for the
statements.”77 Plaintiffs do not dispute that Rule 9(b) applies here.78
Plaintiffs’ pleadings as to this theory fall well short. Plaintiffs allege substantially
nothing about the text of the custodial invoices. They fail to identify a single statement in any of
the invoices that arguably was false or even misleading. Given that plaintiffs allege that they
LACERA Cpt ¶ 187; LADWP Cpt ¶ 185; Relator Cpt ¶ 184.
LACERA Cpt ¶ 188; LADWP Cpt ¶ 186; Relator Cpt ¶ 185.
FED. R. CIV. P. 9(b).
Lundy v. Catholic Health Sys. of Long Island, Inc., 711 F.3d 106, 119 (2d Cir. 2013)
(internal quotation marks omitted).
See Gold v. Morrison-Knudsen Co., 68 F.3d 1475, 1476–77 (2d Cir. 1995) (concluding that
Rule 9(b) applied to pleading violations of the federal FCA).
received these invoices regularly, it is particularly reasonable to have expected more here.
Plaintiffs’ inadequate pleadings would warrant dismissal under Rule 8 as well.
Plaintiffs’ allegations do not explain how defendants’ invoicing of a flat custodial fee plausibly
could have misled plaintiffs into believing that defendants were forswearing the ability to make
additional compensation from the relationship. Plaintiffs’ subjective beliefs are irrelevant absent
a plausible basis to conclude that the beliefs were reasonable and induced by the statements in
Underpinned by Fraud
Plaintiffs’ failure to allege any falsity on the face of the invoices does not end the
matter. Some California courts have recognized that “the claim itself need not be false but only need
be underpinned by fraud.”79 For example, liability exists when the government pays on a claim
under a contract that “‘was originally obtained based on false information or fraudulent pricing.’”80
These CFCA cases draw directly from federal cases recognizing a “fraud-in-the-inducement” theory
of false claims liability.81 The underlying principle is that fraud inducing a contract does “‘not spend
itself with the execution of the contract.’”82 Rather, the “‘taint’” of the fraud enters into each
City of Pomona v. Superior Court, 89 Cal. App. 4th 793, 802 (2001); accord Contreras, 182
Cal. App. 4th at 448.
Pomona, 89 Cal App. 4th at 802 (quoting Harrison v. Westinghouse Savannah River Co.,
176 F.3d 776, 787 (4th Cir. 1999)).
Harrison, 176 F.3d at 787.
Id. (quoting United States ex rel. Marcus v. Hess, 317 U.S. 537, 543 (1943)).
subsequent claim for payment the fraudster thereafter makes upon the government.83 The Fourth
Circuit has synthesized this theory as requiring proof of four elements: “(1) whether there was a
false statement or fraudulent course of conduct; (2) made or carried out with the requisite scienter;
(3) that was material; and (4) that caused the government to pay out money or to forfeit moneys due
(i.e., that involved a ‘claim’).”84
Plaintiffs allege a number of different fraud theories. The Court takes them in turn.85
The Court considers first whether plaintiffs adequately have alleged that the custodial
invoices were underpinned by fraud due to defendants’ “best execution” representations—a theory
sustained under the federal mail and wire fraud statutes in DOJ. Defendants principally challenge
this theory for failing to allege inducement or reliance.86
Id. (quoting Hess, 317 U.S. at 543).
Id. at 788.
See, e.g., LACERA Cpt ¶ 184.
BNY Mellon suggests that the Court need not undertake this analysis because plaintiffs’
failure to attach a copy of a custodial invoice or specify any invoice’s precise contents
warrant dismissal of this theory under Rule 9(b). The Court disagrees. Under the fraud-inthe-inducement theory, the circumstances constituting the relevant fraud are the statements
and omissions inducing payment of the invoices. The content of the invoices themselves
is peripheral, at best.
Defendants contend also that CFCA claims must be grounded in an “objective falsehood,”
whereas federal mail fraud requires only that the statement be misleading. See United
States ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 376 (4th Cir. 2008). But
plaintiffs do not contend merely that “best execution” was misleading. Rather, they allege
that the term had an industry meaning objectively inconsistent with defendants’ pricing
practices. The Court thus need not consider whether the CFCA incorporates a stricter
Each plaintiff alleges that “[h]ad Plaintiff known of Defendants’ real conduct with
respect to executing FX transactions, Plaintiff would not have continued to vest Defendants with the
heightened level of trust exhibited in its custodial relationship and carried out through Standing
Each plaintiff further alleges that defendants’ false and fraudulent
representations—including its statements about best execution—“induced Plaintiff to maintain the
status quo with respect to its custodial relationship with Defendant and induced it to continue
utilizing Standing Instruction as part of this relationship.”88
Defendants argue that these allegations are insufficient because plaintiffs nowhere
allege that the fraud induced the original contract—they contend that “[p]laintiffs must allege that
BNYM made misrepresentations about [the] standing instruction service which caused the Funds
to retain BNYM as custodian.”89 Because plaintiffs do not allege that the representations at issue
were even made before they first initiated their custodial relationships with BNY Mellon, defendants
continue, the allegations are insufficient.
Defendants’ narrow understanding of the fraud-in-the-inducement theory has little
to recommend it, and the Court rejects it. As the Fourth Circuit has described it, the critical question
falsity standard than federal mail fraud. See Contreras, 182 Cal. App. 4th at 450 n.9
(questioning Wilson and suggesting that concerns it raises are better addressed through
CFCA’s scienter provisions).
See, e.g., LACERA Cpt ¶ 182.
Id. ¶ 183.
LADWP Def. Mem. at 17 (emphasis in original); LACERA Def. Mem. at 17 (emphasis in
is whether the fraudulent conduct “caused the government to pay out money.”90 It is axiomatic that
Section 12651(a)(1) “attaches liability, not to the underlying fraudulent activity, but to the claim for
payment.”91 Plaintiffs may hold defendants liable if defendants fraudulently induced the payment
of individual custodial invoices, even if the representations postdated the original relationship.
In assessing whether the fraud induced payment of the invoices to create CFCA
liability, it is natural to consider California’s “actual reliance” standard for common law fraud in the
inducement claims.92 The misrepresentation need not be “the sole or even the predominant or
decisive factor in influencing [plaintiff’s] conduct.”93 It is sufficient if a misrepresentation is a
“substantial factor” in the decision.94 An inference of reliance arises if the misrepresentation was
material.95 Moreover, when plaintiff “alleges exposure to a long-term advertising campaign, the
plaintiff is not required to plead with an unrealistic degree of specificity that the plaintiff relied on
particular advertisements or statements.”96 Finally, where the fraud is an omission, “[o]ne need only
prove that, had the omitted information been disclosed one would have been aware of it and behaved
Harrison, 176 F.3d at 788.
United States ex rel. Onnen v. Sioux Falls Ind. Sch. Dist. No. 49-5, 688 F.3d 410, 414 (8th
Cir. 2012) (emphasis added) (internal quotation marks omitted).
Engalla v. Permanente Medical Grp., Inc., 15 Cal. 4th 951, 976 (1997).
Id. at 977.
In re Tobacco II Cases, 46 Cal. 4th 298, 328 (2009).
Defendants therefore overreach in arguing that plaintiffs’ payment of custodial fees
after the alleged fraud was revealed forecloses inducement as a matter of law. This argument may
persuade at summary judgment or trial, but does not carry the day now. Moreover, at least certain
plaintiffs allegedly were billed individual transaction fees for each standing instruction trade.98
Plaintiffs allege that they stopped using standing instruction once they learned about defendants’
practices.99 Plaintiffs may seek to establish that payment of these individual transaction fees, even
if not that of the overall custodial fees, was induced by fraud.
Nevertheless, plaintiffs’ allegations are conclusory and insufficient. Nowhere do
plaintiffs allege that they or their agents reviewed the web page on which the “best execution”
representation was made100 or even that they or their agents otherwise were aware that defendants
Mirkin v. Wasserman, 5 Cal. 4th 1082, 1093 (1993).
Defendants vigorously dispute that they ever charged such fees. This is a curious dispute,
as it would seem objectively ascertainable to all parties whether such fees were being
charged. In any event, plaintiffs’ allegations as to this purely factual matter must be taken
as true at this stage. To the extent that defendants believe that plaintiffs’ counsel can have
no good-faith basis for this allegation, there is other relief they may seek at the appropriate
See, e.g., LACERA Cpt ¶ 182.
See In re Lehman Bros. Sec. and ERISA Litig., 903 F. Supp. 2d 152, 191 (S.D.N.Y. 2012)
(“Nowhere does any plaintiff allege, however, that it ever read any of the Offering
Documents and relied on the alleged misrepresentations contained in those documents in
making its decision to purchase Lehman securities, as is required to sustain a claim for fraud
under California law.” (citing Murphy v. BDO Seidman, LLP, 113 Cal. App. 4th 687, 701
(2003))); cf. Small v. Fritz Cos., 30 Cal. 4th 167, 184 (2003) (requiring specific allegations
of reliance to mount a securities holder claim).
had been representing their service as providing best execution.101 Plaintiffs allege that they would
have acted differently had they known of defendants’ conduct. But this allegation would answer the
wrong question if plaintiffs had no right to know about defendants’ pricing practices in the first
place. Absent adequate pleading of a duty to disclose independent of the “best execution”
representation,102 plaintiffs must allege at a minimum some ex ante awareness of the representation
that could permit the inference that it was a substantial factor in their payment of the invoices.103
Plaintiffs next allege that defendants fraudulently omitted their markups and time
stamps on trades.104 In DOJ, this Court made clear that such a theory is deficient in the absence of
any fiduciary relationship; defendants were under no obligation to disclose such information in an
arm’s-length transaction.105 This is dispositive as to TCERS and SBCERS, which nowhere allege
the existence of a fiduciary relationship with defendants.
Nor have LACERA or LADWP alleged facts sufficient to establish such a duty to
disclose. They were not acting in a fiduciary capacity as to standing instruction trades. While the
See Murphy, 113 Cal. App. 4th at 702–3 (setting forth circumstances in which plaintiffs
may plead indirect reliance).
The Court addresses duties to disclose in the next subsection.
The Court emphasizes that it expresses no view about how much need be alleged to clear
this bar. See Murphy, 113 Cal. App. 4th at 698–701 (setting forth pleadings of reliance that
suffice). It holds only that the present allegations are insufficient.
See, e.g., LACERA Cpt ¶ 184.
941 F. Supp. 2d at 469, 482-83.
Court has allowed them to proceed on claims of breach of fiduciary duty with respect to certain
alleged misrepresentations and nondisclosures, neither LACERA nor LADWP has sought to explain
how that would give rise to a duty to disclose the omissions of which they complain—markups and
Plaintiffs allege that defendants fraudulently “assign[ed] fictitious FX rates to
currency trades as exhibited in reports and statements.”106 This is not a viable independent theory
of fraud. Asserting that the rates are “fictitious” merely begs the question—as opposed to what
allegedly “real” rates? “The Bank did not misrepresent the rates for the FX transactions. It is
conceded that the rates [BNY Mellon] charged were accurately reflected on monthly account
statements.”107 Perhaps plaintiffs mean that the rates were represented to be best execution rates but
were not. In such a case, the fraud would be the “best execution” representation, not the rates.
Plaintiffs allege that defendants fraudulently represented that they would offer
competitive rates.108 This Court already has concluded this allegation fails to state a breach of
contract claim. It certainly does not state a claim for fraud.
LACERA and LADWP, but not relator, allege that BNY Mellon fraudulently
represented during the RFP process that it would act as a fiduciary and safekeep and accurately
See, e.g., LACERA Cpt ¶ 184.
See La. Mun. Police Emps. Ret. Sys. v. JPMorgan Chase & Co., No. 12 Civ. 6659 (DLC),
2013 WL 3357173, at *9 (S.D.N.Y. July 3, 2013).
See, e.g., LACERA Cpt ¶ 184.
report the fund’s assets.109 Even assuming that plaintiffs allege a breach of any of these duties, they
fail to allege that these representations knowingly were false when made, in 1994 for LACERA and
in 2004 for LADWP.110
Finally, plaintiffs fail to allege that defendants’ representations regarding netting
amounted to fraud for the reasons explained in DOJ.111
Under this theory, a contractor’s submission of a claim for payment is understood
to be an implicit certification that it has complied with certain contractual or regulatory
requirements.112 Accordingly, courts have held that a contractor may be held liable for submission
of a false claim if it “submit[s] claims for payment while knowing that it has violated contractual
provisions that are material to the government’s decision to pay.”113 As a California intermediate
court has explained, “[i]t is reasonable for governmental entities to assume that contractors seeking
payment are in compliance with the material terms of their contracts.”114 If the contractor cannot
comply and informs the government, then CFCA liability is unwarranted. “But if that same
See, e.g., LACERA Cpt. ¶ 184; LADWP Cpt. ¶ 182.
LACERA Cpt ¶ 122; LADWP Cpt ¶ 123.
DOJ, 941 F. Supp. 2d at 478-79.
See generally Contreras, 182 Cal. App. 4th at 447–53 (citing cases).
United States v. Sci. App. Int’l Corp., 626 F.3d 1257, 1267 (D.C. Cir. 2010) (“SAIC”)
Contreras, 182 Cal. App. 4th at 453.
contractor is aware of the noncompliance and chooses to seek payment without informing the
government, then it is a fraud appropriately within the scope of the CFCA.”115
Plaintiffs contend that in submitting the custodial invoices, defendants impliedly and
falsely certified that they complied with alleged contractual obligations to (1) provide best
execution, (2) provide competitive rates, (3) provide netting, and (4) generally act for the benefit of
its custodial clients.
Plaintiffs’ allegations fail.116 In these cases, the defendant’s submission of a claim
is wrongful because it seeks payment which it knows it does not deserve, as the defendant failed to
comply with material contractual conditions. The problem here is that plaintiffs have not alleged
that defendants knew, or were reckless in not knowing, that they were obligated contractually to
provide best execution, let alone that this condition was material. The Court upheld plaintiffs’
breach of contract claims in SEPTA and in this case only because, after a careful reading, it was
plausible that language on certain forms incorporated into the contract a webpage promising best
execution. It is at least equally plausible that the best execution representation was not incorporated.
What exactly was incorporated is the “imprecise contractual provision”117 prompting “differences
in interpretation growing out of a disputed legal question”118 that courts have held cannot be the
The Court need not reach defendants’ arguments based on Mikes v. Straus, 274 F.3d 687
(2d Cir. 2001).
Wilson, 525 F.3d at 378.
United States ex rel. Lamers v. City of Green Bay, 168 F.3d 1013, 1018 (7th Cir. 1999).
basis of liability under the federal FCA.119
Thus, even assuming that plaintiffs adequately have alleged that defendants
knowingly failed to provide best execution contrary to their representations, they have not alleged
that defendants knowingly failed to provide best execution contrary to their material contractual
obligations. The difference is critical. In the former case, defendants may be liable for common law
fraud and breach of fiduciary duty. They may even be liable under Section 12651(a)(1) if the fraud
was part of a wrongful scheme to induce the government to pay on a claim. But only in the latter
case would the defendants’ submission of a claim constitute a wrongful implied certification.
None of plaintiffs’ other purported breach of contract claims warrants a different
conclusion. The netting provision theory suffers the same defect as best execution. The Court has
rejected outright a breach of contract claim predicated on “competitive rates.” Finally, the Court
rejects plaintiffs’ implied certification claim premised on defendants’ alleged failure to act in their
best interests. The extent to which defendants were obligated to do so is a disputed legal question,
and plaintiffs have not alleged that defendants knew that their conduct violated their contractual
LACERA and LADWP contend that the custodial invoices were false on a theory of
This does not mean that contractual requirements must be crystal clear to create false claims
liability. Where the defendant advances its interpretation in bad faith, or perhaps even when
it is aware of a sufficiently high risk that its interpretation is wrong, then it may act
recklessly by seeking payment without disclosing the potential dispute. Plaintiffs have not
alleged facts sufficient to conclude that this is such a case.
In Hooper v. Lockheed Martin Corp.,121 the Ninth Circuit recognized that a contractor
can be liable under the federal FCA when it knowingly underestimates the potential cost of a project
in order to win the business and then charges more for the work once completed. The initial
underbid is deemed a false claim.
Plaintiffs here allege that BNY Mellon reduced its fees for custodial services to win
the business, anticipating that it could make much more from plaintiffs through standing instruction
FX trades.122 Plaintiffs thus allege that the custodial invoices were false because “the [d]efendants’
proposal d[id] not disclose the amount the Defendants intend to secretly earn from [plaintiffs].”123
The analogy to Hooper is not apt. A critical component of liability in Hooper was
that the initial bid was supposed to reflect the contractor’s good-faith estimate of the cost of the
project. The contractor was liable because it knowingly understated this amount. But this case is
more analogous to United States ex rel. Bettis v. Odebrecht Contractors of Cal., Inc.124 There, the
D.C. Circuit rejected an underbid theory because “[t]he disputed bid in this case did not purport to
be an opinion or an estimate; rather, [the] bid was merely an offer to enter into a contract” at a
certain price. A razor company may lower the price of its razor to sell high-priced blades. A smart
Relator (on behalf of TCERS and SBCERS) does not advance this theory.
688 F.3d 1037, 1049 (9th Cir. 2012).
See, e.g., LACERA Cpt ¶¶ 87–88.
See, e.g., id. ¶ 193.
393 F.3d 1321, 1328 (D.C. Cir. 2005)
phone maker may reduce the price of its phones and then charge for an expensive data plan. A
company does not commit fraud merely by lowering its prices to develop customer relationships in
anticipation of further business in the future.
Plaintiffs’ Section 12651(a)(2) count also requires that they allege that defendants’
submitted a false claim. As discussed above, plaintiffs have failed to do so.125
Section 12651(a)(4) renders liable one who “[h]as possession, custody, or control of
public property or money used or to be used by the state or by any political subdivision and
knowingly delivers or causes to be delivered less property than the amount for which the person
receives a certificate or receipt.”126 Defendants move to dismiss on the ground that plaintiffs have
failed to allege any “certificate or receipt” within the meaning of the provision. Plaintiffs rejoin that
when they paid the custodial invoices, they “submitted money to the Bank confirming the total
amount of money to which the Bank was entitled. These payments were certificates and/or receipts
to the Bank because they demonstrated the total amount of money owed to the Bank.”127
Plaintiffs’ argument borders on the nonsensical.
The “certificate or receipt”
The Court notes further that while plaintiffs allege that BNY Mellon falsely represented that
it would price transactions within a “range of the day,” LACERA Cpt ¶ 200, it cites no such
representation with particularity.
CAL. GOV’T CODE § 12651(a)(4) (2009) (emphasis added).
See, e.g., LACERA Cpt ¶ 210.
quantified property in the “custody” of BNY Mellon in order to judge whether the amount of
property returned by BNY Mellon to plaintiff was proper.128 It plainly was not a quantification of
what plaintiffs think BNY Mellon’s fee should be.
As relevant here, Section 12651(a)(7) imposes liability on one who “[k]nowingly
makes, uses, or causes to be made or used a false record or statement to conceal, avoid, or decrease
an obligation to pay or transmit money or property to the state or to any political subdivision.”129
In particular, plaintiffs allege that “[t]he Bank utilized fictitious FX pricing in their statements and
reports to Plaintiff[s] in order to conceal an obligation to remit moneys due and owing to
The Court assumes, contrary to defendants’ contentions, that the term “obligation”
encompasses defendants’ alleged contractual obligation to provide best execution in this case.131
There is little law regarding the contours of this requirement in either the CFCA or the
federal FCA. See United States ex rel. Aakhus v. Dyncorp, Inc., 136 F.3d 676, 681 (10th
Cir. 1998) (concluding that certificate or receipt “must be created by the government,”
“must have some connection or relationship to the defendant’s return of property,” and
“must indicate how much property defendant allegedly returned to the government”).
CAL. GOV’T CODE § 12651(a)(7) (2009) (emphasis added).
See, e.g., LACERA Cpt ¶ 216.
See United States ex rel. Bahrani v. Conagra, Inc., 465 F.3d 1189, 1202 (10th Cir. 2006);
United States v. Pemco Aeroplex, Inc., 195 F.3d 1234, 1237–38 (11th Cir. 1999).
The Court considers only the contractual obligation because, as noted above, plaintiffs have
not alleged adequately that defendants had an independent fiduciary duty to provide best
Nevertheless, plaintiffs’ allegations fall short. Plaintiffs must allege that defendants “knowingly”
engaged in the conduct proscribed by Section 12651(a)(7). It is natural to read this provision as
therefore requiring that defendants have known, or have been reckless in not knowing, that they had
such a contractual obligation in the first place. As discussed in the context of implied certification,
plaintiffs have not done so.132
Fraud by Concealment
The allegations of LACERA and LADWP regarding their fraud by concealment
counts could not be more general.133 They allege that defendants failed to disclose “important facts”
and disclosed “some facts” while failing to disclose “other important facts,” making the disclosure
The Court recognizes that “Rule 9(b) does not require that the complaint explain the
plaintiff’s theory of the case, but only that it state the misrepresentation, omission or other action
or inaction that plaintiff claims was fraudulent.”135 Nevertheless, it is not at all apparent what
specific “facts” plaintiffs contend they should have been told or which disclosed facts made the
failure to disclose other unstated facts deceptive.
While plaintiffs enumerated specific
representations and omissions in the context of the CFCA counts, their common law fraud counts
A New York court has rejected an equivalent reverse false claim count on the same ground.
See Schneiderman, 2013 WL 4516209, at *29 (dismissing claim because “plaintiffs’ very
claim as to the existence of a breach is the subject of a bona fide dispute”).
LADWP Cpt ¶¶ 231–39; LACERA Cpt ¶¶ 234–42.
LADWP Cpt ¶ 237.
Midwest Commerce Banking Co. v. Elkhart City Centre, 4 F.3d 521, 523 (7th Cir. 1993).
are separate bases of liability. The Court and defendants are entitled to specific notice as to the facts
underlying plaintiffs’ common law claims. In any event, plaintiffs’ claims fail for the same reasons
as the CFCA fraud-in-the-inducement claims failed.
Defendants may be held liable under Section 17200 if their actions were unlawful,
unfair, or fraudulent.136 The complaints allege only that defendants’ actions were unlawful for
violating the CFCA. As plaintiffs have failed to allege such a violation, plaintiffs do not state a
claim under this prong.137 Similarly, plaintiffs fail to allege a claim under the fraudulent prong.138
Finally, plaintiffs contend that defendants’ practices were unfair. As a number of
courts have recognized, California law regarding what constitutes an “unfair” practice under this
statute is in considerable disarray.139 Plaintiffs concede that the “unfair” prong is “tethered to some
legislatively declared policy” and assert that defendants’ conduct violates the policy against
See Cel-Tech Commc’ns, Inc. v. Los Angeles Cellular Tel. Co., 20 Cal. 4th 163, 180 (1999).
The Court expresses no view regarding whether plaintiffs could allege unlawful conduct in
light of this Court’s conclusion in DOJ that the federal government adequately alleged
claims that BNY Mellon was liable for mail and wire fraud. See People ex rel. Trutanich
v. Joseph, 204 Cal. App. 4th 1512, 1525 (2012) (“The unlawful practices prohibited by
section 17200 are any practices forbidden by law, be it civil or criminal, federal, state, or
municipal, statutory, regulatory, or court-made . . . . [S]ection 17200 borrows violations of
other laws and treats them as unlawful practices independently actionable under section
17200 et seq.”).
In re Tobacco II, 46 Cal. 4th at 326 (concluding that plaintiffs needed to show actual
reliance to establish standing under fraud prong of Section 17200).
Drum v. San Fernando Valley Bar Ass’n, 182 Cal. App. 4th 247, 256-57 (2010) (discussing
three different tests that have been applied).
committing fraud against the government.140
A practice need not violate another law to be deemed unfair.141 Plaintiffs, however,
provide no framework for this Court to assess whether defendants’ conduct may have been unfair
even if it fell short of being fraudulent. In light of the disposition of the rest of these motions, the
Court concludes that it would not be an efficient use of judicial resources to determine whether
defendants’ practices could be deemed unfair if not unlawful or fraudulent. For now, it suffices to
note that plaintiffs contend only that the practices were unfair because they were fraudulent, but they
have failed to allege that the practices are fraudulent. The claim is dismissed.
Claims Against BNY Mellon Corp.
Defendants move to dismiss claims against BNY Mellon Corp., contending that
plaintiffs have not alleged that they had any relationship with BNY Mellon Corp., as opposed to its
subsidiaries like BNY Mellon and BNY Mellon Trust Company. Plaintiffs respond only that every
allegation in the complaint includes BNY Mellon Corp. as well as its subsidiaries and its affiliates.
This is insufficient. Plaintiffs may not evade their obligation to plead specific claims against
specific defendants by generalized pleading. All claims against BNY Mellon Corp. will be
For the foregoing reasons, defendants’ motions to dismiss [12 MD 2335 DI 167, 12
Cel-Tech Commc’ns, 20 Cal. 4th at 186.
Id. at 181.
Civ. 8990 DI 4; 12 MD 2335 DI 213, 12 Civ. 3064 DI 108] are granted in all respects as to BNY
Mellon Corp. and granted in all respects as to the other defendants save, with respect to the other
defendants, that they are denied insofar as LACERA and LADWP assert the claims sustained in
SEPTA—that is, claims for (1) breach of contract premised on defendants failure to provide “best
execution,” and (2) breach of fiduciary duty premised on certain alleged misrepresentations and
nondisclosures. LACERA, LADWP, and relator may move for leave to amend provided that any
such motion shall be filed no later than June 15, 2014
May 1, 2014
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