- Jan 15, 2013
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Two large international banks Credit Suisse and BNP Paribas are expected to plead guilty to criminal charges within the next few weeks. If that happens, they will pay large fines and officially be felons.
Should anyone care?
Is there really a difference between criminal convictions of banks and civil settlements that yield equally large fines?
Attorney General Eric H. Holder Jr. certainly thinks so. He proudly proclaimed a couple of weeks ago that there was no bank too big to jail.
The obvious problem with that statement is that it is a non sequitur. Big or small, banks and other corporations are too inanimate to jail. Executives conceivably could be sent to prison, but that is not what we are talking about here.
But if companies cannot be sent to Leavenworth, they can face the death penalty. Some think that is what happened more than a decade ago to Arthur Andersen, which was the fifth-largest accounting firm in the country before it was accused of criminal conduct in connection with the Enron scandal. It is possible, even likely, that Andersen would have failed without criminal charges, so deep was the damage to its reputation, but the precedent has been cited by some large companies that succeeded in avoiding criminal charges.
Perhaps the most interesting part of the prolonged and leak-filled dance leading up to the expected criminal charges has been the effort to assure that the banks will stay in business after they plead guilty. Credit Suisse is expected to admit that it helped Americans evade taxes, and BNP Paribas is expected to admit that it did business with countries blacklisted by the United States. Regulators will not enforce statutes that would seem to bar the banks from some activities.
To put it another way, the Justice Department has gone to great lengths to guarantee that convicted banks will not be treated as criminals.
In being treated that way, the banks will receive the same breaks other banks have come to expect when they are caught violating rules or laws.
Those laws often prohibit violators from taking part in certain businesses or receiving privileges granted to law-abiding companies. But those rules are routinely waived as part of settlements with the Securities and Exchange Commission and other government agencies.
To some, such waivers are obviously necessary. If you dont get a waiver as part of a settlement, one former S.E.C. official told me, it is hard to imagine getting a settlement.
The S.E.C. has not appeared to be eager to publicize the waivers. They are posted on the S.E.C. website, but they are not announced at the same time as the settlements and are not included in the court documents describing the settlements. As a result, news articles focus on the penalty being paid, not the penalties the law might have required absent the waivers.
Are waiver requests ever refused? I could find no record of such a refusal on the S.E.C. website. Waiver discussions are apparently conducted privately and informally and then put on paper only when the matter is wrapped up. If the S.E.C. will not grant the waiver, it is never formally requested and thus stays off the public record.
A typical example came on March 12, when Jefferies, a brokerage firm, accepted an S.E.C. censure and fine for failing to supervise Jesse C. Litvak, a former managing director who had been convicted days earlier of defrauding the governments Troubled Asset Relief Program. At the same time, the firm signed a deferred prosecution agreement with the Justice Department stemming from the same incidents. It paid $25 million in penalties.
Under the law including a provision of the Dodd-Frank financial overhaul law adopted in 2010 Jefferies would have automatically been barred from underwriting private offerings of securities under S.E.C. regulations that allow companies to issue securities without making disclosures that would otherwise be required.
On that same day, March 12, a lawyer for Jefferies sent a letter to the commission asking for waivers. Failing to grant them, the lawyer said, would have an adverse effect on third parties. And who were those innocent third parties? They were companies that have retained, or may retain in the future, Jefferies to underwrite such deals.
If that is enough to justify a waiver from the rules, it is hard to imagine an investment bank that is not eligible for one. There was no claim that any clients or potential clients would be unable to find other underwriters.
On March 12, an S.E.C. official granted one waiver to Jefferies. The full commission voted to grant another.
Until last month, no one involved in the waiver machine had ever complained publicly about it. Then Kara Stein, an S.E.C. commissioner appointed last year, issued a stinging objection to a waiver her colleagues granted the Royal Bank of Scotland. The bank had signed a deferred prosecution agreement and paid a $100 million fine after bank officials were accused of conspiring to fix the London interbank offered rate, or Libor.
Ms. Stein noted that some banks had received waiver after waiver. One large financial firm alone, in a 10-year period, has received over 22 different waivers, she said, often making the argument that it has a strong record of compliance with federal securities laws. She did not name the firm, but other officials identified it as JPMorgan Chase.
I fear that the commissions action to waive our own automatic disqualification provisions arising from R.B.S.s criminal misconduct may have enshrined a new policy, she wrote, that some firms are just too big to bar. She disclosed that the vote for the waiver was 3 to 2.
The waiver the commission granted to R.B.S. concerned its status as a well-known seasoned issuer, known in the halls of the S.E.C. as a WKSI, pronounced WIK-see. That status, held by virtually all large companies whose securities trade in the United States, allows them to sell new shares or bonds quickly without going through the normal disclosure process and having the offering reviewed by S.E.C. staff members.
Daniel M. Gallagher, another commissioner, responded with his own statement, essentially raising questions about the wisdom, and even the constitutionality, of automatic disqualifications. I am not proposing to ignore the severity or gravity of criminal misconduct, he wrote. But the misconduct itself is appropriately punished through the underlying criminal or civil enforcement process.
He added that it is important to ask who is really punished by the loss of WKSI status. Rather than targeting the individuals who engaged in the wrongful conduct, loss of WKSI status punishes the issuer by removing important flexibility that the issuer has in the issuance of securities, a punishment that could damage innocent shareholders.
If, or when, Credit Suisse and BNP enter guilty pleas, you can bet that the S.E.C. will swing into action with waivers. Other regulators will do what they can to assure that there are no consequences beyond those contained in the settlement or court-ordered punishment.
Which brings us back to the original question. Does it matter that these will be criminal, not civil, punishments?
Maybe it does, even if the fines are no larger than they would have been in a civil case. A criminal record might hurt if either bank gets into trouble again. Some customers might react by moving business to institutions that are not convicted felons.
And there is the fact the banks have tried hard to avoid having to make criminal pleas. They apparently think it matters.
Waivers may be practically necessary to settle cases, and they may justly avoid excessive punishments that would reduce competition in banking. But at least they deserve more sunlight than they now receive.
When waivers are granted in connection with S.E.C. settlements, they should be mentioned, and explained, in the same news releases that disclose the punishment. If there are criminal pleas from the two banks soon, the announcements of the pleas and penalties should detail the various waivers being granted.
Then at least the public will notice that, as Ms. Stein put it, we repeatedly relieve issuers of the supposedly automatic consequences of their misconduct.
Link to NewYork Times article
Should anyone care?
Is there really a difference between criminal convictions of banks and civil settlements that yield equally large fines?
Attorney General Eric H. Holder Jr. certainly thinks so. He proudly proclaimed a couple of weeks ago that there was no bank too big to jail.
The obvious problem with that statement is that it is a non sequitur. Big or small, banks and other corporations are too inanimate to jail. Executives conceivably could be sent to prison, but that is not what we are talking about here.
But if companies cannot be sent to Leavenworth, they can face the death penalty. Some think that is what happened more than a decade ago to Arthur Andersen, which was the fifth-largest accounting firm in the country before it was accused of criminal conduct in connection with the Enron scandal. It is possible, even likely, that Andersen would have failed without criminal charges, so deep was the damage to its reputation, but the precedent has been cited by some large companies that succeeded in avoiding criminal charges.
Perhaps the most interesting part of the prolonged and leak-filled dance leading up to the expected criminal charges has been the effort to assure that the banks will stay in business after they plead guilty. Credit Suisse is expected to admit that it helped Americans evade taxes, and BNP Paribas is expected to admit that it did business with countries blacklisted by the United States. Regulators will not enforce statutes that would seem to bar the banks from some activities.
To put it another way, the Justice Department has gone to great lengths to guarantee that convicted banks will not be treated as criminals.
In being treated that way, the banks will receive the same breaks other banks have come to expect when they are caught violating rules or laws.
Those laws often prohibit violators from taking part in certain businesses or receiving privileges granted to law-abiding companies. But those rules are routinely waived as part of settlements with the Securities and Exchange Commission and other government agencies.
To some, such waivers are obviously necessary. If you dont get a waiver as part of a settlement, one former S.E.C. official told me, it is hard to imagine getting a settlement.
The S.E.C. has not appeared to be eager to publicize the waivers. They are posted on the S.E.C. website, but they are not announced at the same time as the settlements and are not included in the court documents describing the settlements. As a result, news articles focus on the penalty being paid, not the penalties the law might have required absent the waivers.
Are waiver requests ever refused? I could find no record of such a refusal on the S.E.C. website. Waiver discussions are apparently conducted privately and informally and then put on paper only when the matter is wrapped up. If the S.E.C. will not grant the waiver, it is never formally requested and thus stays off the public record.
A typical example came on March 12, when Jefferies, a brokerage firm, accepted an S.E.C. censure and fine for failing to supervise Jesse C. Litvak, a former managing director who had been convicted days earlier of defrauding the governments Troubled Asset Relief Program. At the same time, the firm signed a deferred prosecution agreement with the Justice Department stemming from the same incidents. It paid $25 million in penalties.
Under the law including a provision of the Dodd-Frank financial overhaul law adopted in 2010 Jefferies would have automatically been barred from underwriting private offerings of securities under S.E.C. regulations that allow companies to issue securities without making disclosures that would otherwise be required.
On that same day, March 12, a lawyer for Jefferies sent a letter to the commission asking for waivers. Failing to grant them, the lawyer said, would have an adverse effect on third parties. And who were those innocent third parties? They were companies that have retained, or may retain in the future, Jefferies to underwrite such deals.
If that is enough to justify a waiver from the rules, it is hard to imagine an investment bank that is not eligible for one. There was no claim that any clients or potential clients would be unable to find other underwriters.
On March 12, an S.E.C. official granted one waiver to Jefferies. The full commission voted to grant another.
Until last month, no one involved in the waiver machine had ever complained publicly about it. Then Kara Stein, an S.E.C. commissioner appointed last year, issued a stinging objection to a waiver her colleagues granted the Royal Bank of Scotland. The bank had signed a deferred prosecution agreement and paid a $100 million fine after bank officials were accused of conspiring to fix the London interbank offered rate, or Libor.
Ms. Stein noted that some banks had received waiver after waiver. One large financial firm alone, in a 10-year period, has received over 22 different waivers, she said, often making the argument that it has a strong record of compliance with federal securities laws. She did not name the firm, but other officials identified it as JPMorgan Chase.
I fear that the commissions action to waive our own automatic disqualification provisions arising from R.B.S.s criminal misconduct may have enshrined a new policy, she wrote, that some firms are just too big to bar. She disclosed that the vote for the waiver was 3 to 2.
The waiver the commission granted to R.B.S. concerned its status as a well-known seasoned issuer, known in the halls of the S.E.C. as a WKSI, pronounced WIK-see. That status, held by virtually all large companies whose securities trade in the United States, allows them to sell new shares or bonds quickly without going through the normal disclosure process and having the offering reviewed by S.E.C. staff members.
Daniel M. Gallagher, another commissioner, responded with his own statement, essentially raising questions about the wisdom, and even the constitutionality, of automatic disqualifications. I am not proposing to ignore the severity or gravity of criminal misconduct, he wrote. But the misconduct itself is appropriately punished through the underlying criminal or civil enforcement process.
He added that it is important to ask who is really punished by the loss of WKSI status. Rather than targeting the individuals who engaged in the wrongful conduct, loss of WKSI status punishes the issuer by removing important flexibility that the issuer has in the issuance of securities, a punishment that could damage innocent shareholders.
If, or when, Credit Suisse and BNP enter guilty pleas, you can bet that the S.E.C. will swing into action with waivers. Other regulators will do what they can to assure that there are no consequences beyond those contained in the settlement or court-ordered punishment.
Which brings us back to the original question. Does it matter that these will be criminal, not civil, punishments?
Maybe it does, even if the fines are no larger than they would have been in a civil case. A criminal record might hurt if either bank gets into trouble again. Some customers might react by moving business to institutions that are not convicted felons.
And there is the fact the banks have tried hard to avoid having to make criminal pleas. They apparently think it matters.
Waivers may be practically necessary to settle cases, and they may justly avoid excessive punishments that would reduce competition in banking. But at least they deserve more sunlight than they now receive.
When waivers are granted in connection with S.E.C. settlements, they should be mentioned, and explained, in the same news releases that disclose the punishment. If there are criminal pleas from the two banks soon, the announcements of the pleas and penalties should detail the various waivers being granted.
Then at least the public will notice that, as Ms. Stein put it, we repeatedly relieve issuers of the supposedly automatic consequences of their misconduct.
Link to NewYork Times article
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