Credit Suisse and One Collateral Consequence of a Guilty Plea

One collateral consequence of the Credit Suisse guilty plea was the public battering the bank took at a Department of Labor hearing on January 15, 2015.

The room was packed. The company was lawyered up. And a handful of anti-corporate crime activists were lined up to take their shots.


The Department of Labor officials holding the hearing acted as if they didn’t want to be there.

It was clear from their questioning that that they had already decided what they were going to do and how they were going to do it.

But for political reasons, they were going to have a public hearing and might as well suck it up and get on with it.

Last year, Credit Suisse AG plead guilty to charges that it aided and assisted U.S. taxpayers in filing false income tax returns and other documents with the Internal Revenue Service (IRS).

It turns out that the Department of Labor has a “bad actor” rule that automatically disqualifies institutions from claiming the status of qualified professional asset manager (QPAM) — those who advise pension funds and other investment funds.

But as turns out, automatic disqualification in this area is not automatic disqualification.

Credit Suisse wants to continue in the business — and it has asked the Department of Labor to grant it a waiver from disqualification.

The Department granted a preliminary hearing on the waiver issue for January 15, 2015.

The Department of Labor is permitted to waive the disqualification, provided that it finds that the waiver is “administratively feasible, in the interests of the plan and of its participants and beneficiaries, and protective of the rights of participants and beneficiaries of the plan.”

Since 1997, the Department has granted waivers for all 23 firms seeking individual waivers — and that included a waiver for UBS, after a Japanese subsidiary pled guilty.

This didn’t sit well with the public interest activists in the room.

They called on the Department of Labor to break the mold and ban Credit Suisse from investing pension funds.

“Credit Suisse has engaged in a massive crime that involved many of its employees,” Public Citizen’s Bart Naylor told the panel. “This crime was not a rogue employee who ran off the field for a short amount of time. It was essentially a business model complete with a Credit Suisse Bank convenient to the Zurich Airport so that American clients wouldn’t need to be bothered with the beautiful Swiss scenery before they returned to the United States having deposited their funds. Some 52,000 American clients were apparently helped in avoiding paying U.S. taxes by their Credit Suisse enablers.”

Department of Labor official Timothy Hauser — Deputy Assistant Secretary for Programs at the Employee Benefits Security Administration — wondered out loud whether Credit Suisse hadn’t been punished enough.

“There was an entry of a judgment of conviction,” Hauser said. “Credit Suisse was required to pay 2.8, you know, plus billion dollars, and it’s hard to at least from my standpoint, it’s hard to see how what we do here is going to appreciably — if that isn’t a sufficient deterrent, you know, for misconduct, it seems even if I thought it were appropriate for us to make decisions based on that deterrent issue, it’s hard for me to imagine that what we do here is going to make an extra difference, you know.”

“Well, I actually take almost a completely opposite viewpoint,” Naylor said. “I view that as a painfree guilty plea. That $2.8 billion as far as I could tell was paid by shareholders. I have seen no disclosure that senior executives reached into their own personal pockets and paid that money. I have not seen anybody with handcuffs and their arms behind their back walking off to jail. In fact, I’m told that there have been conversations with the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission to make sure that nothing really happened other than there is this black mark in a piece of paper that says guilty on it and that shareholders are $2.8 billion poorer with Credit Suisse.”

“So, in fact, if these other promised penalties are removed, if banks do not get their charter revoked, as did happen with Riggs Bank, for example, if the Securities and Exchange Commission issuers retain their well-known season issuer status, then I think you’re sending a signal that if you’re well lawyered, if you’re of a certain size, and if you get your shareholders to pay enough that it actually gets into the newspaper as a penalty, then you’re fine.”

Hauser wanted to know — isn’t there something we could do, some condition we could impose on the exemption, that you could accept?

“I don’t actually wake up every day trying to figure out how to make life better for Credit Suisse,” Naylor said.

Hauser asked the Naylor and the other corporate critics in the room to focus on whether the safeguards in the proposed exemption were adequate to protect the rights of the participants and the beneficiaries of the plans that Credit Suisse corporate group members manage.

But Heather Lowe of Global Financial Integrity, wasn’t buying Credit Suisse’s claim that the company’s criminal wrongdoing wouldn’t impact it’s management of pension funds.

“Given Credit Suisse’s history of intentional violations of U.S. and foreign laws that involve crafting systems to get around those laws, I think that it would certainly be a very big gamble on the part of the Department of Labor, and I would not want the Department of Labor gambling with my pension fund,” Lowe testified. “Global Financial Integrity does a great deal of work in the area of money laundering, and over the past few years the structure of ‘independent auditors’ who are actually paid by and interact closely with the companies they are hired to audit has been called into question because the audit firms have been found to be allowing the companies to scrub those audits, among other things.”

“In the proposed plan, the auditor isn’t even government-appointed here. They will be chosen by Credit Suisse. The audit will be addressed to Credit Suisse and not to the government. The combination of a company known to look for ways to get around compliance and an audit environment of complicity does not inspire confidence with respect to the proposed oversight plan,” Lowe said.

James Henry of the Tax Justice Network told the Labor Department that they weren’t making the decision in a political vacuum.

“The reason we’re here today is because we think that Credit Suisse got a very light fine from the Department of Justice,” Henry said. “It’s not $2.68 billion by the way, it’s $2.6 billion. It’s tax deductible in Switzerland. No senior executives at Credit Suisse were fined or went to jail as a result of this penalty. Credit Suisse gave up no private banking client names to the U.S. Government, even though Senator Levin pressed for that, and as recently as March 2014, Kathryn Keneally, who is the AAG who was involved in negotiating this settlement, was pressing hard for those names to be released. She resigned two days after the settlement was announced in May.” (Keneally is now a partner at DLA Piper.)

She got a call from a guy at the White House. His name was Broderick Johnson. He’s an assistant to the President of the United States. He said the CEO wants this case settled. And John Podesta, who is a counselor to the President, was paid $1.3 million by Credit Suisse in the last three years. They are active lobbying on behalf of this client.”

“This is not a politically neutral antiseptic decision that you’re making,” Henry said.

“We hear that you are hiring independent monitors as opposed to withdrawing this exemption, and yet the independent monitors you came up with were Roger Altman’s Evercore and it wasn’t you that selected them, it was Credit Suisse, and Fried Frank, which has lots of business with Credit Suisse AG, including the Genzyme deal in 2011.”

“The biggest question is why are you here. If the plan beneficiaries could vote with their feet and have not done so, what do we draw from that?” Henry asked. “Does the Department of Labor just wash its hands of this case and go home because the plan beneficiaries have decided already? Well, then why do we have this law? Why do we have this procedure, and why do we have this hearing?”

“I suggest that there are very strong values at stake here for the public in terms of sanctions for a major financial institution on a global basis to learn once and for all that this kind of behavior is something that senior management will be held responsible for one way or another, not through fines that could be passed along to consumers or to shareholders, not through, you know, apologies, certainly not through the kind of waivers that have been systematically granted not only by you and by the SEC, by the U.S. Federal Reserve in this case for Credit Suisse’s status as a prime dealer. It’s waiver after waiver. So effectively the value of the criminal plea has been obviated, has no teeth, has no impact.”

Consumer advocate Ralph Nader said that “any legal system worth its salt Credit Suisse would have had its charter pulled right there.”

“They pulled the charter of Standard Oil in Ohio in the 1890s,” Nader said. “There’s a tradition here. But that sort of is off the table these days. But secondly, just look at laser-like on the pension plans. Put yourself in the place of that world when a Department of Labor in effect does not require Credit Suisse to rebut a presumption that they are going to continue their ways. You would think they would have a severe burden of proof here for a rebuttable presumption all the way down to the plans to find out are they wining and dining, is there something going on here, are the plans oblivious as one of you mentioned to what’s going on.”

“If you saw yourself in an educational role to confer with these plans, and you already have one that’s quit, and say, look, do you really want to be associated with somebody like this? Do you want to have a reputational taint? Do you want to have an unrebutted presumption by a corporate criminal that it’s going to be as clean as a whistle from the top down from now on?” Nader asked.

“And, of course, I don’t buy this idea that this is a subsidiary, you know, that didn’t engage in all this,” Nader said. “That’s just another example of how corporations evade responsibility. This is a centralized bank. All these banks are centralized from the top. They make mistakes and they don’t know what’s going on sometimes, but there’s no doubt about how authority is hierarchical and top down.”

Nader said that one Texas retirement system “quit in May after the criminal plea, with a press release saying ‘We have a policy against hiring firms convicted of felonies.’”


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