5 BIG Banks Expected To Plead Guilty To Felony Charges
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 nonprosecution
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 A.G., the banking unit that signed the 2012
nonprosecution agreement, is expected to plead guilty to the earlier charges
and pay a fine that could be 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 S.E.C.'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.
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 nonprosecution 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 D.P.A. 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
nonprosecution 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
D.P.A. or N.P.A. 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 S.E.C. 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 fast-track 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 S.E.C. 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 S.E.C.'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 S.E.C.'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
A.G., the main banking unit, reached the nonprosecution 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.''
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