The Ongoing Credit Suisse Saga - What is Appropriate Punishment for Crimes Committed by Big Entities? (5/19/14)

I write today on articles about the alleged upcoming deal where Credit Suisse and BNA Paribas will plead guilty to some federal crime or crimes.  The first is an exceptional article in the New York times.  Floyd Norris, Convicted of Felonies, Banks Are Allowed to Stay in Business (NYT 5/15/14), here.

Mr. Norris asks:  "Is there really a difference between criminal convictions of banks and civil settlements that yield equally large fines?"

He explores whether big banks and organizations are "too big to jail," noting the obvious that you cannot incarcerate a lifeless, breathless entity.  Some interesting excerpts

But if companies cannot be sent to Leavenworth [the notorious -- at least renowned -- federal penitentiary], 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.

Readers of this blog will know that a similar dynamic played out in the KPMG bullshit tax shelter saga, where KPMG took a DPA that helped assure that it survived.

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.

The article discusses mechanisms to avoid adverse ongoing effects.  In particular, he focuses on SEC waivers of laws that would otherwise limit activity.  Those waivers appear to be routine for larger entities and get little public attention.

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.

The other articles all seem based on a story in SonntagsZeitung, a Swiss publication, which apparently had access to the final draft of the deal with DOJ.  I don't have the SonntagsZeitung article but do have one from another publication, a credible Swiss publication, which summarizes it.  Credit Suisse Guilty Plea Looms as U.S. Reassures Banks (swissinfo.ch 5/19/14), here.  I offer key excerpts from the swissinfo article:

With Credit Suisse Group AG poised to become the first bank in more than a decade to admit to a crime in the U.S., regulators have been reaching out to some of the firm’s biggest business partners to avert a panic, according to a person briefed on those communications. 

The bank reached a deal to plead guilty as early as today to resolve claims it helped Americans evade taxes and will pay about $2.5 billion to the Justice Department and regulators, said a person familiar with the matter, requesting anonymity because the details aren’t public.
Switzerland’s second-biggest bank will be allowed to continue operating in the U.S., two people familiar with the matter said. In their outreach ahead of the expected guilty plea, regulators reassured some of the largest U.S. financial firms that the current situation wouldn’t become a repeat of the crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc., the person briefed on the conversations said. 

* * * 

The biggest challenge facing Credit Suisse could be that some of its own clients, such as pension funds, have internal requirements that prohibit them from doing business with an entity that has pleaded guilty to a crime, one person said. Customer flight could hurt the bank’s credit ratings, boosting the firm’s borrowing costs. Representatives of two of the largest U.S. banks said the firms intend to continue their trading and banking relationships with Credit Suisse. 

* * * 

Under terms of the agreement, Credit Suisse’s parent company would plead guilty to a conspiracy charge in federal court in Alexandria, Virginia, the people said. Seven of the bank’s executives were indicted in 2011 in that court. 

False Statements 

A guilty plea by a bank’s parent company would be the first since Credit Lyonnais SA, which admitted in January 2004 it made false statements to the Fed. 

Credit Suisse will admit to a statement of facts that shows the U.S. tax evasion was widely fostered by the bank, the people said. The firm won’t have to disclose the names of U.S. account holders under terms of the agreement, one person said. 

The Swiss government won’t resort to emergency laws to help Credit Suisse, Schweiz am Sonntag reported yesterday, citing comments by Swiss Finance Minister Eveline Widmer-Schlumpf to politicians at closed-door talks on May 16.

Another article citing the SonntagsZeitung article says that CS will admit "running a criminal enterprise but we did not know."  Credit Suisse to admit 'criminal' actions in US tax dispute (globalpost 5/18/14), here.  From a legal perspective, I would be surprised if DOJ would agree to such equivocation.  (And where is the venerable concept of willful blindness that DOJ finds so useful against ordinary criminals? And, of course, this evokes Ronald Reagan's famous line that "mistakes were made," see Wikipedia here.)