More On Legal & Compliancefrom The Advisor's Professional Library
- The Few and the Proud: Chief Compliance Officers CCOs make significant contributions to success of an RIA, designing and implementing compliance programs that prevent, detect and correct securities law violations. When major compliance problems occur at firms, CCOs will likely receive regulatory consequences.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
As U.S. Justice Department prosecutors angle to bring the first criminal charges against global banks since the financial crisis, they’ll have to stare down warnings of uncontainable collateral damage.
The 2002 collapse of Arthur Andersen, the accounting firm indicted in the Enron scandal, “should be a lesson” for prosecutors, Brad Hintz, an analyst at Sanford C. Bernstein & Co., said Thursday in an interview on Bloomberg Television. “Don’t play with matches.”
Stung by lawmakers’ criticism that multibillion-dollar settlements have done too little to punish Wall Street in the wake of the financial crisis, prosecutors are considering indictments in probes of Credit Suisse Group AG and BNP Paribas SA, a person familiar with the matter said. Even after talking with financial regulators about ways to mitigate damage -- such as ensuring banks keep charters -- prosecutors might not fully understand consequences for the market, according to industry lawyers and bankers who are following the case.
Bank clients -- including trustees, fiduciaries and pension funds -- could be forced to cut ties with a financial institution labeled a criminal enterprise, the lawyers and bankers said, asking not to be named because they weren’t authorized to talk publicly. Counterparties also might think twice before entering into billion-dollar transactions with such firms. Damaging a bank’s business could lead to broader fallout across the financial industry, just as Lehman Brothers Holdings Inc.’s collapse in 2008 prompted investors to withdraw from other firms on concern its exit would set off a wave of losses.
Criminal action would have to be handled so that any review of a bank’s charter wouldn’t spook customers or revoke a firm’s license, said Gil Schwartz, a partner at Schwartz & Ballen LLP and a former Federal Reserve lawyer.
“The mere threat of requiring a hearing could cause customers to lose confidence in the institution and could cause a run on the bank,” Schwartz said.
The warnings show the resistance prosecutors face in seeking to prove global banks aren’t too big and systemically important to indict. Preet Bharara, the U.S. attorney for the Southern District of New York, signaled in a March speech that a large financial firm would be charged soon, despite the industry’s bleak predictions of fallout.
“Companies, especially financial institutions, will do almost anything to avoid a tough enforcement action and therefore have a natural and powerful incentive to make prosecutors believe that death or dire consequences await,” he said. “I have heard assertions made with great force and passion that if we take any criminal action, the skies will darken; the oceans will rise; nuclear winter will be upon us; and the world as we know it will end.”
Credit Suisse has been the target since 2011 of a U.S. criminal probe into whether it helped Americans evade taxes. BNP Paribas has been investigated for possible violations of U.S. sanctions barring business with prohibited countries.
Shares of Zurich-based Credit Suisse fell 0.3 percent yesterday to 27.91 francs after news reports on prosecutors’ deliberations. BNP Paribas dropped 3.2 percent to 54.11 euros. The Paris-based firm said it may need to pay much more than the $1.1 billion it set aside for the U.S. sanctions case.
Spokesmen for both firms declined to comment on the prosecutors’ considerations.
There are a variety of ways for prosecutors to limit damage from criminal charges. One option would be to force a bank’s subsidiary, rather than the parent company, to enter a guilty plea, said the lawyers and bankers. The Justice Department has gone down that path in settling charges involving the Foreign Corrupt Practices Act, which forbids U.S. companies from bribing foreign officials to win business.
“I would expect regulatory discussions with these banks in question will avoid systemic consequences,” said Darrell Duffie, a finance professor at Stanford University’s Graduate School of Business in Stanford, California. “I expect the situation to be controlled.”
Many concerns expressed by financial professionals focused on less tangible fallout, such as lost confidence in a firm. Some compared such a situation to Bear Stearns Cos., which was battered by doubts about its strength in 2008, leading to its emergency sale to JPMorgan Chase & Co.
Client psychology also could come into play. For example, even if investment managers aren’t prohibited from working with a bank, they may shy away because they don’t want to explain why they put funds in a firm with a criminal past.
Mindful that the specter of criminal charges helped put financial institutions such as Bank of Credit and Commerce International and Drexel Burnham Lambert Inc. out of business, prosecutors in Washington and New York have met with representatives of the Federal Reserve and the Office of the Comptroller of the Currency to discuss the regulatory risks of indictments, according to two people briefed on the matter.
In the case of BNP Paribas, New York’s top banking regulator, Benjamin Lawsky, isn’t planning to suspend its license, a person familiar with that matter said earlier this week. Lawsky instead is considering seeking a deal that would terminate some bank employees, claw back pay and temporarily suspend the firm’s ability to transfer money through New York branches on behalf of foreign clients, the person said.
Consequences of such a suspension could be far-reaching, because smaller banks around the world rely on the Paris-based lender for dollar-clearing services, lawyers and bankers said.
The Justice Department’s attempt to get the Federal Reserve and OCC involved makes sense, said Samuel Buell, a former Enron Task Force prosecutor who now teaches at Duke University School of Law.
“You can’t do a guilty plea of a systemically important financial institution without first getting the regulators on board a commitment that the conviction won’t put the bank out of business,” he said in an e-mail. “That seems to be going on here, not surprisingly.”
Credit Suisse and BNP Paribas may be serving as guinea pigs to see how criminal charges affect banks, potentially paving the way for such claims against larger U.S. firms when they break laws, said Phillip Phaan a professor at the Johns Hopkins Carey Business School in Baltimore.
“These are test cases,” said Phan. “There’s a pragmatism behind this. You look for a target that’s small enough and that will send a message.”
Prosecuting banks would break with a practice of brokering settlements with companies that are considered integral to the financial system. Previous probes were resolved through so-called non-prosecution and deferred-prosecution agreements, which have been criticized by U.S. lawmakers for failing to hold banks accountable.
“It’s about time,” said Buell, who was part of the prosecution team at the trial of Arthur Andersen, whose indictment put about 85,000 people out of work. “The argument that we can’t have guilty pleas because of debarment provisions that are written into various regulatory codes has always seemed to be a case of the tail wagging the dog.”