Naked Capitalism: Will the Banksters Really Pay?


Prosecutors Reopening Cases Against Bank Recidivists; Change or “Change You Can Believe in”?

Posted on October 30, 2014 by

The New York Times yesterday published a new story by Ben Protess and Jessica Silver-Greenberg on how Federal prosecutors are investigating reopening cases against big banks and hitting them with additional charges. Reader Richard D, who was curious about the story, wrote, “It is hard for me to know whether this is a momentous event, or a nothingburger.”

It’s actually somewhere in the middle. While it represents prosecutors starting to use muscles that had atrophied, at least as far as financial firms are concerned, as readers will no doubt suspect, the shift falls well short of the levels of official zeal needed.

But there’s actually an important shift discussed at some length in the article that may have bigger ramifications: that powerful bank consultants and lawyers are no longer being taken at their word.

Here’s the guts of the story:

The reopening of these cases represents a shift for the government, the first acknowledgment that prosecutors are coming to terms with the limitations of how they punish bank misdeeds. Typically, when banks have repeatedly run afoul of the law, they have returned to business as usual with little or no additional penalty — a stark contrast to how prosecutors mete out justice for the average criminal.

When punishing banks, prosecutors have favored so-called deferred-prosecution agreements, which suspend charges in exchange for the bank’s paying a fine and promising to behave. Several giant banks have reached multiple deferred or nonprosecution agreements in a short span, fueling concerns that the deals amount to little more than a slap on the wrist and enable a pattern of Wall Street recidivism.

Even now that prosecutors are examining repeat offenses on Wall Street, they are likely to seek punishments more symbolic than sweeping. Top executives are not expected to land in prison, nor are any problem banks in jeopardy of shutting down.

The reason for initially seeing this story as yet another overhyping of legal actions against banks is that the targets are all foreign banks and hence safe politically. The cases being re-investigated fall into two categories: money laundering and abuses related to Libor fixing settlements.

New York superintendent of financial services Benjamin Lawsky is the driving force behind the money laundering cases. He is identified as the party pushing for the tougher money-laundering settlements, based on evidence that Standard Chartered lied, as in hid evidence about the extent of its misconduct when its settlement was being negotiated. The fact the it was PriceWaterhouseCoopers that provided an unduly rosy report led Lawsky’s office to look into a second settlement, one with Mitsubishi-IBJ, where the bank also used PriceWaterhouseCoopers, and the consultant’s role again looks sus.

Lawsky, as he did during his first high profile action, threatened Standard Chartered with pulling its US banking license, and in the settlement with BNP Paribas, suspended their access to dollar clearing, which is a serious blow to many of their businesses. So Lawsky ability to do real damage to banks has no doubt played a role in securing the cooperation of Federal prosecutors. They do not want Lawsky to pull out his big guns out of frustration about not getting their cooperation. As an aside, Standard Chartered has behaved so badly and has been at points openly defiant that it deserves to be raked over the coals.

The second groups of cases, in which foreign banks are most prominent, is foreign exchange manipulation, which would violate previous settlement related to Libor manipulation. The miscreants flagged in the current New York Times account are Barclays and UBS; the other players under investigation are Deutsche, JP Morgan, and Citigroup. This is a straight-up Department of Justice deal, an apparent last-ditch effort to help burnish Holder’s legacy.

If the New York Times comment section is any guide, there was nary a good word to be said about this new prosecutorial push. Readers want to see executives punished and view mere fines as wrist-slaps at best. And this cynicism is warranted save for the way critical power brokers that have enabled bank misconduct are losing their privileged standing. Here is the germane part of the story:

When Mr. Lawsky made his initial $250 million settlement with the bank last year, the punishment was based partly on an outside consultant’s estimate of the illegal dealings. But the New York State regulator has since uncovered emails indicating that the consultant, PricewaterhouseCoopers, watered down the report under pressure from the bank, according to regulatory records.

In August, Mr. Lawsky imposed a $25 million penalty on PricewaterhouseCoopers, which said at the time that the report was “detailed” and “disclosed the relevant facts.”

After that settlement, people briefed on the matter said, prosecutors at the Manhattan district attorney’s office opened an investigation into the work that PricewaterhouseCoopers did for the Japanese bank, a previously unreported development. Already, the prosecutors have requested the consulting firm’s records in the case.

The investigations, the people said, also unearthed emails showing that PricewaterhouseCoopers changed the report not only at the suggestion of the bank, but also at the behest of lawyers working on the bank’s behalf. Like many banks caught in the government’s cross hairs, the Bank of Tokyo-Mitsubishi turned to Sullivan & Cromwell, an elite law firm as woven into the fabric of Wall Street as the banks it represents. Sullivan & Cromwell also represented Standard Chartered in the bank’s 2012 settlement with the Justice Department in Washington and the district attorney’s office in Manhattan.

More recently, the government has grown skeptical of the argument that some banks are simply too big to charge, an argument that Sullivan & Cromwell often employs for its clients. That argument was tested in a recent case against BNP Paribas, the giant French bank accused of processing billions of dollars for Sudan and Iran.

At a meeting in Washington this year, a lawyer from Sullivan & Cromwell cautioned prosecutors about the potential fallout from BNP pleading guilty to a crime, according to people briefed on the meeting. To illustrate the concern, the lawyer presented prosecutors with a fake newspaper article reporting that a huge bank had pleaded guilty for the first time in decades. The hypothetical report detailed what regulatory problems could befall the bank if prosecutors did not lower their demands for a fine and take precautions when extracting a plea.

Why is this significant? Sullivan & Cromwell, and in particular bank uber lawyer Rodgin Cohen, is in a league by itself in terms of advising banks on regulatory behavior. Cohen has access and clout second to none. Notice that prosecutors chose to leak to the Times the role that Sullivan & Cromwell played not only in the cases now being reopened, but publicized its earlier, dubious arguments in the BNP Paribas case. The sources made clear that the firm’s “don’t touch that dial” scare talk regarding guilty pleas and other tough settlements was no longer working. And prosecutors are no doubt incensed at a law firm pushing a consultant to take the fall for giving misleading information.

This is important not simply regarding the standing of Sullivan & Cromwell, but the use of elite advisors as liability shields. The prosecutors are trying to send the message that if you as the bank client try that sort of thing, you’ll pay even more in the end. And it also means that prosecutors will be more skeptical of supposedly reputable professionals in bank employ and may start getting more independent analyses in high-profile cases.

At this stage, it is incremental change, but it shows a rift among elite regulators and high-powered insiders, that the officialdom is finally putting its foot down and saying certain types of conduct no longer wash. This may seem a modest place to draw the line, but it’s still a meaningful shift in attitudes. It says that within the club, certain types of corruption are no longer tolerated. That’s a long-overdue step in the right direction.


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