Bank of New York Mellon Corp., beset by legal challenges and anunderperforming stock, said Chairman and Chief Executive OfficerRobert P. Kelly left after a dispute with directors over the way heran the company.

Kelly, 57, who had led the world's biggest custody bank since2007, left by “mutual agreement” with the board, the company saidyesterday in a statement. His successor is Gerald L. Hassell, 59,who has been president of New York-based BNY Mellon since 1998.

The company's stock has tumbled 32 percent this year and tradesat about the same level as in early 1997. Like other custody banks,it's struggled with low interest rates, which squeeze profits onlending cash and securities, and running money-market funds. BNYMellon has been sued for allegedly overcharging pension funds onforeign-exchange trades and has been accused by New York's attorneygeneral of violating state law in its role representing investorsin mortgage securities.

“The stock price is the ultimate measure of a CEO's job, and thestock hasn't done well,” Gerard Cassidy, an analyst at RBC CapitalMarkets in Portland, Maine, said in a telephone interview. Cassidy,who rates the stock “outperform,” said Boston-based State StreetCorp., whose stock is down 23 percent this year, has done a betterjob winning new business than BNY Mellon.

Kelly's departure, which surprised analysts, was announced afterthe close of regular U.S. trading. BNY Mellon fell 26 cents to$20.55 on electronic markets.

Directors Said Alienated
Jeep Bryant, acompany spokesman, declined to comment beyond the statement, whichdidn't elaborate on the differences between Kelly and the board.BNY Mellon's outside directors include Wesley W. von Schack,chairman of Aegis Ltd; Michael Kowalski, CEO of New York-basedTiffany & Co.; John Surma Jr., head of Pittsburgh-based U.S.Steel Corp.; and Edmund Kelly, chairman of Boston-based LibertyMutual Holdings Co.

The board believed the CEO alienated some directors and topexecutives by blaming some company problems on other members ofsenior management, the Wall Street Journal reported, citing peoplefamiliar with the matter. Kelly also was viewed by some as havingbecome difficult to work with, and the board feared losing highlyvalued employees, the newspaper said.

BofA Overture
Kelly was one of at least fiveindustry executives who rebuffed overtures in 2009 from Bank ofAmerica Corp. to replace Kenneth D. Lewis as CEO at the largestU.S. lender. Kelly, the leading outside candidate, dropped out onDec. 14 that year after the board offered a $20 millioncompensation package, a person familiar with the matter said at thetime. The Charlotte, North Carolina-based company named an insider,Brian T. Moynihan, as its leader.

Kelly earned $19.4 million last year, a 38 percent increase from2009, boosted by stock awards and incentive pay, according to aregulatory filing. He became head of BNY Mellon after the bankbought Pittsburgh-based rival Mellon Financial Corp. in July 2007,vaulting the company past JPMorgan Chase & Co. as the largestcustody bank. Kelly previously had led Mellon, which recruited himfrom Wachovia Corp. in 2006.

Under his tenure BNY Mellon expanded through acquisitions,buying PNC Financial Service Group Inc.'s investment-servicingbusiness for $2.31 billion and Germany's BHF Asset Servicing GmbHfor 253 million euros ($363 million) in 2010.

“I said two weeks ago Bob Kelly should be fired and I gaveseveral reasons for it,” Richard Bove, an analyst with RochdaleSecurities LLC in Lutz, Florida, said in a telephone interview.Kelly was “too conservative” in setting prices for the bank'sproducts and using the balance sheet to make money, Bove said.

Management Trainee
Hassell joined Bank of NewYork as a management trainee in 1973 and has been on the board ofdirectors since 1998. He's held leadership positions in investmentservices, corporate banking, credit, strategic planning andadministrative services. Hassell has a bachelor's degree from DukeUniversity and a master's of business administration from New YorkUniversity's Stern School of Business.

“Gerald is ideally positioned to guide BNY Mellon through thenext phase of its growth and to bring it to its full potential,”von Schack, lead director of BNY Mellon, said in the statement.

Custody banks keep records, track performance and lendsecurities for institutional investors including mutual funds,pension funds and hedge funds. State Street and BNY Mellon alsomanage investments for individuals and institutions. BNY Mellon,founded by former Treasury Secretary Alexander Hamilton in 1784,sold its retail bank branches to JPMorgan in 2006.

Cost Savings
BNY Mellon reported a 12 percentincrease in second-quarter earnings as acquisitions and marketgains lifted assets and the fees from overseeing them. The bank hadassets under custody of $26.3 trillion and assets under managementof $1.3 trillion at the end of June.

BNY Mellon bank said Aug. 10 it planned to cut 1,500 jobs, or 3percent of its 48,900 employees. Kelly said that “expenses havebeen growing unsustainably faster” than revenue.

On a July conference call, he had said the bank would trim costsby moving people to cheaper locations, consolidating real estateholdings and cutting its procurement budget. The bank has movedjobs in the past few years to Pittsburgh, Manchester in the UnitedKingdom and the Indian cities of Pune and Chennai to take advantageof lower costs.

N.Y. Attorney General
New York AttorneyGeneral Eric Schneiderman last month said that BNY Mellon violatedstate law in its role representing investors in mortgage securitiescreated by Bank of America's Countrywide Financial unit.

BNY Mellon should pay penalties and restitution to investors,Schneiderman said in an Aug. 4 court filing involving Bank ofAmerica's proposed $8.5 billion mortgage-bond settlement.

BNY Mellon, along with State Street, has been accused inlawsuits of inflating the price of some foreign-exchangetransactions and acting to conceal those markups. BNY Mellon isfacing lawsuits from Virginia, Florida and Pennsylvania.

The bank has denied wrongdoing in all the cases, sayingcustomers were informed about its pricing policy and had the optionof using other vendors for their trades.

On the July conference call, Kelly blamed some of the rise inexpenses on escalating legal costs.

“Frankly, these are the unpleasant realities of a post-crisisenvironment,” he said.

Bloomberg News

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