Prosecutors Suspect Repeat Offenses on Wall Street
It would be the Wall Street equivalent of a parole violation: Just two years after avoiding prosecution for a variety of crimes, some of the world's biggest banks are suspected of having broken their promises to behave.
A mixture of new issues and lingering problems could violate earlier settlements that imposed new practices and fines on the banks but stopped short of criminal charges, according to lawyers briefed on the cases. Prosecutors are exploring whether to strengthen the earlier deals, the lawyers said, or scrap them altogether and force the banks to plead guilty to a crime.
That effort, unfolding separately from a number of well-known investigations into Wall Street, has ensnared several giant banks and consulting firms that until now were thought to be in the clear.
Prosecutors in Washington and Manhattan have reopened an investigation into Standard Chartered, the big British bank that reached a settlement in 2012 over accusations that it transferred billions of dollars for Iran and other nations blacklisted by the United States, according to the lawyers briefed on the cases. The prosecutors are questioning whether Standard Chartered, which has a large operation in New York, failed to disclose the extent of its wrongdoing to the government, imperiling the bank's earlier settlement. best essay writing services offered ever
New York State's banking regulator is also taking a fresh look at old cases, reopening a 2013 settlement with the Bank of Tokyo-Mitsubishi UFJ over accusations that the bank's New York branch did business with Iran, according to the lawyers who were not authorized to speak publicly.
The regulator, Benjamin M. Lawsky, the lawyers said, is negotiating a new settlement deal with the bank that, if it goes through, would involve a penalty larger than the $250 million it paid last year. Mr. Lawsky suspects that the bank initially played down the scope of its wrongdoing.
PricewaterhouseCoopers, the influential consulting firm that advised the Japanese bank on that case, is also under investigation, according to the lawyers briefed on the matter. The Manhattan district attorney's office is examining whether the firm watered down a report about the bank's dealings with Iran before it was sent to government investigators.
Those developments, not previously reported, are part of a broader revisiting of settlements with some of the world's biggest banks, an effort that has focused on foreign banks but could eventually spread to American institutions.
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.
Still, fearing a certain fallout from the new round of scrutiny, banks have bolstered their legal teams. Standard Chartered, for instance, has retained one of the most lauded litigators in the country, Theodore V. Wells Jr., to work on the reopened sanctions case, according to the lawyers briefed on the matter.
The decision to revisit the cases also draws attention to consulting firms that helped shape the original settlements. When determining the extent of wrongdoing at a bank, the government often relies on assessments from consultants that are handpicked and paid by the same bank.
The Bank of Tokyo-Mitsubishi case demonstrated the potential pitfalls of that approach. 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.
Weeks later, after lowering the fine to $8.9 billion, the prosecutors forced the bank to plead guilty. Far from reporting a crisis, BNP's chief executive that day noted that the bank "will once again post solid results this quarter."
Not every bank will have to plead guilty in future cases. Prosecutors still see benefits from deferred-prosecution agreements, which can require banks to install independent monitors and more broadly overhaul their practices than in the event of a guilty plea.
Lawmakers and other critics, however, contend that the agreements can lack teeth, begetting a pattern of misbehavior.
Since 2001, at least eight big banks have committed further offenses after receiving an initial deferred-prosecution agreement, according to data assembled by Brandon L. Garrett, a University of Virginia law school professor and author of the book, "Too Big to Jail: How Prosecutors Compromise With Corporations."
UBS has reached three deferred or nonprosecution agreements since 2009. On Tuesday, the Swiss bank said it had reached an agreement with the Justice Department to extend by another year a two-year nonprosecution agreement that was scheduled to expire in December.
The cycle of misbehavior is difficult to break.
Regulators and prosecutors blame a culture that prioritizes profit over compliance. And as banks have grown larger, and more international, illegality can stop in one unit of a bank even as it flourishes in another.
Standard Chartered is at risk of becoming Exhibit A of corporate backsliding. The Justice Department's criminal division in Washington and the district attorney's office in Manhattan, which settled with Standard Chartered in 2012 over its business dealings with Iran, are exploring whether the bank repeatedly violated that deferred-prosecution agreement.
The prosecutors, Leslie R. Caldwell in Washington and Cyrus R. Vance Jr. in Manhattan, have not decided whether to take additional action against the bank. But as an initial step, lawyers briefed on the matter said, they are expected to extend the length of the deferred-prosecution agreement, which would have otherwise expired in December. In an August regulatory filing, the bank acknowledged that the agreement "is likely to be extended."
The prosecutors are questioning whether the bank underestimated the amount of its improper dealings with Iran, according to the lawyers briefed on the matter. In the course of an investigation into another bank, the lawyers said, evidence emerged that Standard Chartered had processed other transactions that it did not relay to the government. And because the 2012 settlement agreement applied only to transactions that had "already been disclosed," the discovery of additional illegal transactions could scuttle the deal.
The prosecutors also took notice of Mr. Lawsky's recent decision to file his second case against Standard Chartered in two years, faulting the bank for breakdowns in a computer system that was supposed to catch suspicious transactions. In August, Mr. Lawsky fined the bank $300 million for the lingering compliance woes, a penalty that came in addition to the $340 million the bank paid Mr. Lawsky's agency in 2012.
It didn't take long for concerns to arise. Just weeks after the bank settled in late 2012, its chairman appeared to violate a provision of the deal that forbade Standard Chartered executives from issuing "any public statement contradicting the acceptance of responsibility."
In a conference call, the chairman referred to the illicit transactions as "clerical errors" — comments he later retracted.