Few things would be as surprising as the sight of JPMorgan Chase & Co. pleading guilty in a criminal case. Yet this could be a real possibility, if we are to believe recent news reports about the bank’s settlement negotiations with the Justice Department.
This week, for instance, the Wall Street Journal said JPMorgan may have to pay as much as $11 billion and plead guilty to a criminal charge to settle a Justice Department investigation of the bank’s sales of mortgage bonds several years ago. The markets’ reaction? Yawn.
Perhaps a criminal case against a major U.S. financial institution wouldn’t be such a big deal after all, especially if resolved swiftly. It may come down to outside perceptions of the government’s intent. If prosecutors show they are determined to put a firm out of business -- say, by getting an indictment and pushing to strip its licenses -- investors, customers and counterparties would understandably react harshly.
Not every case has to be this way. Even a settlement that includes a guilty plea could be designed to have few collateral consequences, as long as the bank’s regulators go along.
“The question is always going to be: Are they going to be debarred? Is there a chance they could lose their banking charter as a result of a conviction?” says Brandon Garrett, a University of Virginia law professor who is working on a book about corporate prosecutions. “If a settlement could be structured the right way, a guilty plea could work in terms of punishing the company without destroying it.”
Let’s assume that the Justice Department unveils a deal one day in which a big bank agrees to plead guilty to a felony count of some sort. It pays a fine, maybe gets some probationary period as part of its sentence, but doesn’t lose its ability to do business because prosecutors secure cooperation from the bank’s regulators. Waivers are obtained, if necessary. And the government makes a point to tell depositors not to worry.
The public would shrug. There may be reputational damage for the bank, but probably no more than the harm done by the conduct itself or by a typical deferred-prosecution agreement. Something important would be accomplished, too: It would disprove the popular notion that it’s impossible to prosecute a large U.S. financial-services company without killing it.
This isn’t to say charges are warranted against JPMorgan, only that the government taboo needs to end someday with somebody. Prosecutors should have plenty of opportunities -- if not with JPMorgan, then with another major U.S. bank.
Companies can’t be put in jail, of course. And, as Garrett put it to me, “You can’t actually hold a company morally accountable.” The goal is to hold it practically accountable.
Prosecuting companies isn’t a substitute for punishing individuals who commit corporate crimes. The two should go hand in hand. If a company commits fraud in the course of selling cockamamie securities to widows and orphans, the fact that it isn’t a natural person shouldn’t immunize it.
The government criminally charges corporations all the time, especially for antitrust and environmental crimes -- just not big banks. In March, U.S. Attorney General Eric Holder told the Senate Judiciary Committee, in essence, that some financial institutions are indeed too big to prosecute because of the damage to the economy that might ensue.
That long has been the conventional wisdom. Yet Holder’s comments drew a backlash. Justice Department officials have begun talking a somewhat different game lately. “All prosecutors around the country should be thinking a bit more about institutions, not just individuals, because sometimes that’s how justice is ultimately done,” U.S. Attorney Preet Bharara of New York, whose office is prosecuting the hedge fund SAC Capital Advisors LP, said last week at a conference.
It is old hat to say that no major U.S. financial-services firm has survived an indictment. I have written the same thing myself before. This statement also is very carefully worded. There just aren’t many examples.
E.F. Hutton & Co. pleaded guilty in 1985 to wire and mail fraud related to a check-kiting scheme. Two years later, the Justice Department threatened to indict the brokerage on money-laundering charges. Then the stock market crashed. E.F. Hutton couldn’t make it as a stand-alone company and soon was sold. It might have vanished anyway even without its legal troubles. Similarly, Drexel Burnham Lambert pleaded guilty to six felony charges in 1989 after its executives concluded that the investment bank couldn’t survive an indictment. That bought Drexel time. It went bankrupt the next year after its junk-bond holdings cratered.
The scandal-ridden Bank of Credit and Commerce International, which had headquarters in London and then Abu Dhabi, was indicted in the U.S. in 1988 and pleaded guilty to money laundering in 1990. The bank was indicted again in the U.S. in 1991, but by then it was in liquidation.
French lender Credit Lyonnais was indicted by a federal grand jury in California in 2003, the year it was bought by Credit Agricole SA. It pleaded guilty to charges of lying to banking regulators, and its acquirer is still with us. Likewise, the Justice Department in 2012 got a guilty plea to felony wire fraud from the Japanese subsidiary of Swiss bank UBS AG.
As for Arthur Andersen LLP, the most famous example, the accounting firm’s clients fled after it was indicted in 2002 on an obstruction-of-justice count. Andersen arguably doesn’t belong in the same category as the others, however. Its core business was auditing financial statements, making it more a professional-services firm than a financial-services provider. (Andersen’s conviction was overturned on appeal in 2005.)
If Andersen does belong in this discussion, so should the securities class-action law firm Milberg Weiss LLP, which was indicted in a 2006 racketeering case. Two years later, the charges were dropped, and the firm reached a $75 million settlement with the government after four former partners, including founding partner Melvyn Weiss, pleaded guilty to federal charges. The firm remains in business under the name Milberg LLP.
There is no reason a large bank would automatically have to suffer the same fate as Andersen unless the feds want it to.
(Jonathan Weil is a Bloomberg View columnist.)
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