By Ben Protess and Michael Corkery, The New York Times, May 14, 2015
For most people, pleading guilty to a felony means they will very likely land in prison, lose their job and forfeit their right to vote. But when five of the world’s biggest banks plead guilty to an array of antitrust and fraud charges as soon as next week, life will go on, probably without much of a hiccup.
The Justice Department is preparing to announce that Barclays, JPMorgan Chase, Citigroup and the Royal Bank of Scotland will collectively pay several billion dollars and plead guilty to criminal antitrust violations for rigging the price of foreign currencies, according to people briefed on the matter who spoke on the condition of anonymity. Most if not all of the pleas are expected to come from the banks’ holding companies, the people said – a first for Wall Street giants that until now have had only subsidiaries or their biggest banking units plead guilty.
The Justice Department is also preparing to resolve accusations of foreign currency misconduct at UBS. As part of that deal, prosecutors are taking the rare step of tearing up a 2012 non-prosecution agreement with the bank over the manipulation of benchmark interest rates, the people said, citing the bank’s foreign currency misconduct as a violation of the earlier agreement. UBS AG, the banking unit that signed the 2012 non-prosecution agreement, is expected to plead guilty to the earlier charges and pay a fine that could be as high as $500 million rather than go to trial, the people said.
The guilty pleas, scarlet letters affixed to banks of this size and significance, represent another prosecutorial milestone in a broader effort to crack down on financial misdeeds. Yet as much as prosecutors want to punish banks for misdeeds, they are also mindful that too harsh a penalty could imperil banks that are at the heart of the global economy, a balancing act that could produce pleas that are more symbolic than sweeping.
Holding companies, while appearing to be the most important entities at the banks, are in less jeopardy of suffering the consequences of guilty pleas. Some banks worried that a guilty plea by their biggest banking units, which hold licenses that enable them to operate branches and make loans, would be riskier, two of the people briefed on the matter said. The fear, they said, centered on whether state or federal regulators might revoke those licenses in response to the pleas.
Behind the scenes in Washington, the banks’ lawyers are also seeking assurances from federal regulators – including the Securities and Exchange Commission and the Labor Department – that the banks will not be barred from certain business practices after the guilty pleas, the people said. While the SEC’s five commissioners have not yet voted on the requests for waivers, which would allow the banks to conduct business as usual despite being felons, the people briefed on the matter expected a majority of commissioners to grant them.
Plea Deals an Exercise in Stagecraft
In reality, those accommodations render the plea deals, at least in part, an exercise in stagecraft. And while banks might prefer a deferred-prosecution agreement that suspends charges in exchange for fines and other concessions – or a non-prosecution deal like the one that UBS is on the verge of losing – the reputational blow of being a felon does not spell disaster.
“For any company there’s a huge reputational difference between a deferred-prosecution agreement and a guilty plea,” said David A. O’Neil, a partner at Debevoise & Plimpton and former senior Justice Department official who helped secure a guilty plea to a financial crime last year from the French bank BNP Paribas. “But the government needs to be careful that it doesn’t turn a guilty plea into a DPA with just another name.”
The foreign exchange investigation, which centers on accusations that traders colluded to fix the price of major currencies, will test the Justice Department’s strategy for securing guilty pleas on Wall Street.
In the case of UBS, the bank will lose its non-prosecution agreement over interest rate manipulation, the people briefed on the matter said, a consequence of its misconduct in the foreign exchange case. It is unclear why that penalty will fall on UBS, but not on other banks suspected of manipulating both interest rates and currency prices.
The action against UBS underscores the threats that Justice Department officials issued in recent months about voiding past deals in the event of new misdeeds, a central tactic in a plan to address the cycle of corporate recidivism. Leslie Caldwell, the head of the Justice Department’s criminal division, recently remarked that she “will not hesitate to tear up a DPA or NPA and file criminal charges where such action is appropriate.”
Still, the bank is expected to avoid pleading guilty in the foreign exchange case, the people said, though it will probably pay a fine. While UBS was unlikely to plead guilty to antitrust violations because it was the first to cooperate in the foreign exchange investigation, the bank was facing the possibility of pleading guilty to fraud charges related to the currency manipulation. The exact punishment is not yet final, the people added.
The Justice Department negotiations coincide with the banks’ separate efforts to persuade the SEC to issue waivers from automatic bans that occur when a company pleads guilty. If the waivers are not granted, a decision that the Justice Department does not control, the banks could face significant consequences.
For example, some banks may be seeking waivers to a ban on overseeing mutual funds, one of the people said. They are also requesting waivers to ensure they do not lose their special status as “well-known seasoned issuers,” which allows them to fasttrack securities offerings. For some of the banks, there is also a concern that they will lose their “safe harbor” status for making forward-looking statements in securities documents.
In turn, the SEC asked the Justice Department to hold off on announcing the currency cases until the banks’ requests had been reviewed, one of the people said. As of Wednesday, it seemed probable that a majority of the SEC’s commissioners would approve most of the waivers, which can be granted for a cause like the public good. Still, the agency’s two Democratic commissioners – Kara M. Stein and Luis A. Aguilar, who have denounced the SEC’s use of waivers – might be more likely to balk.
Corporate prosecutions are a delicate matter, peppered with political and legal land mines. Senator Elizabeth Warren, Democrat of Massachusetts, and other liberal politicians have criticized prosecutors for treating Wall Street with kid gloves. Banks and their lawyers, however, complain about huge penalties and guilty pleas.
And lingering in the background is the case of Arthur Andersen, an accounting giant that imploded after being convicted in 2002 of criminal charges related to its work for Enron. After the firm’s collapse, and the later reversal of its conviction, prosecutors began to shift from indictments and guilty pleas to deferred-prosecution agreements. And in 2008, the Justice Department updated guidelines for prosecuting corporations, which have long included a requirement that prosecutors weigh collateral consequences like harm to shareholders and innocent employees.
“The collateral consequences consideration is designed to address the risk that a particular criminal charge might inflict disproportionate harm to shareholders, pension holders and employees who are not even alleged to be culpable or to have profited potentially from wrongdoing,” said Mark Filip, the Justice Department official who wrote the 2008 memo. “Arthur Andersen was ultimately never convicted of anything, but the mere act of indicting it destroyed one of the cornerstones of the Midwest’s economy.”
After years of deferred-prosecution agreements, the pendulum swung back in favor of guilty pleas in 2012. It began modestly with a Japanese subsidiary of UBS pleading guilty to manipulating interest rates. UBS AG, the main banking unit, reached the non-prosecution agreement.
In pursuing cases last year against Credit Suisse and BNP Paribas, prosecutors confronted the popular belief that banks had grown so important to the economy that they could not be charged. BNP, which was accused of doing business with Iran and other countries blacklisted by the United States, paid a record $8.9 billion fine.
Yet after prosecutors announced the deals, the banks’ chief executives promptly assured investors that the effect would be minimal.
“Apart from the impact of the fine, BNP Paribas will once again post solid results this quarter,” BNP’s chief, Jean-Laurent Bonnafé, said.
Brady Dougan, Credit Suisse’s chief at the time, said the deal would not cause “any material impact on our operational or business capabilities.”
Our Comment
This report really calls on us to “put up, or shut up”! It forces us to address questions leading to an ultimatum.
Why might commissioners grant assurances that “would allow the banks to conduct business as usual despite being felons,” allowing life to “go on, probably without much of a hiccup”?
How can “the reputational blow of being a felon… not spell disaster” to an institution so dependent on trust?
Why risk the implications of wiping out the difference between a “deferred presentation agreement” and a guilty plea?
How come waivers to automatic bans could be granted in the best interest of “the public good”? Wouldn’t the bans be automatic for the same reason?
Surely any deal that would not cause any material “impact on [banks’] operational or business capabilities would mean “business as usual”? It would hardly seem to deal with recidivism! (Recidivism: relapse, repeated or habitual relapse, as into crime – tendency towards repetition of criminal or antisocial behaviour patterns.)
Why worry about antitrust and fraud at all? I suppose one must appear to do good.
One might find this report confusing, were it not about oversight. This wonderful word has two contradictory meanings. On the one hand it means “management, direction, control, surveillance.” It also means “neglect, mistake, blunder.”
Time to fish or cut bait – to take a stand on the issue of who, in a democracy should be in charge of the money system, and to act accordingly!
Élan
