Delaware prosecutor puts another dent in banks’ ‘too big to jail’ armor

January 7, 2016

(Reuters) – Late Wednesday, Delaware U.S. Attorney Charles Oberly announced the indictment of Wilmington Trust, which is accused of hiding failed loans in its commercial real estate portfolio in 2009 and 2010. The bank’s supposed deception of regulators and investors propped up the bank’s shaky financials as it undertook a $274 million stock offering in February 2010 to repay money it had accepted from the U.S. government’s Troubled Asset Relief Program.

The alleged scheme supposedly ended a couple of months before M&T Bank announced its acquisition of Wilmington in November 2010 for less than $4 a share – an almost 50 percent discount, according to the indictment, from Wilmington’s trading price the day before the deal was announced. The implication is that Wilmington’s investors were fooled by the bank’s accounting tricks into overvaluing their shares.

These allegations have been kicking around for a while. M&T paid the Securities and Exchange Commission $18.5 million in September 2014 to settle civil allegations that Wilmington monkeyed with its accounting to cover up the dud loans. Last summer, four former high-ranking Wilmington executives, including the former CFO and COO, were indicted for allegedly orchestrating the coverup. The new indictment, which includes accusations against the bank as well as the executives, supersedes last summer’s charges.

Oberly said he thought long and hard about the implications of criminal charges against a bank. “I did not make the decision lightly to seek charges against the Wilmington Trust Corporation,” his announcement said. “Ultimately, I have determined that bringing the (superseding) indictment is necessary to achieve justice  Difficult financial times may present significant business challenges, but they do not excuse anyone or any entity from complying with the law.”

That is a rather different attitude from what we heard in 2012 from Lanny Breuer, who was at the time in charge of the Justice Department’s criminal division. Breuer said Justice favored nonprosecution agreements with big banks because it was worried about the bigger economic consequences of bringing criminal charges against highly regulated institutions. Among other things, the Justice Department suggested, prosecuting banks could cost thousands of innocent employees their jobs.

That oft-criticized policy became known as “too big to jail,” a phrase law professor Brandon Garrett of the University of Virginia adopted as the title of his 2014 book on the “complex, compromised world of backroom deals” between big corporations and the Justice Department.

But something unexpected has happened in the past couple of years, Garrett said when I called him Thursday to talk about the Wilmington indictment: Banks can no longer assume the Justice Department will let them off without criminal accountability.

The change, Garrett said, began in the government’s prosecution of banks involved in rigging the London Interbank Offered Rates. So far, only foreign-based banks have pleaded guilty to Libor manipulation, but Garrett pointed out that two U.S. banks, Citigroup and JPMorgan Chase, have agreed to guilty pleas (along with three foreign banks) in the government’s investigation of foreign currency exchange benchmark rigging. Those guilty pleas, announced last May, were by the banks’ parent companies, not obscure operating units.

Contrary to the banks’ warnings and the Justice Department’s fears, all of the banks that have admitted to felonies have continued to operate in the U.S. Their guilty pleas haven’t caused widespread layoffs inside the banks, let alone in the U.S. economy. “An indictment is not the death penalty,” for banks, Garrett said.

The Wilmington Trust indictment tells U.S. banks that they’re on the hook for routine regulatory filings, not just exotic rate manipulation schemes. U.S. Attorney Oberly’s announcement said Wilmington is the first recipient of TARP funds to be indicted. “After the crisis, there was so much criticism of the failure by prosecutors to indict and get convictions,” Garrett said. “This is what people want.”

Dennis Kelleher of the Wall Street watchdog Better Markets agreed with Garrett that the Wilmington Trust indictment is a positive development, but he said the Justice Department still treats banks much more gently than other corporations accused of crimes. Kelleher said the reason there has been no fallout from bank guilty pleas in the Libor and forex cases is because the government “prewired” the deals to minimize the collateral consequences. Banks, he said, should have to suffer the consequences of their crimes just like every other defendant.

It is also telling, Kelleher said, that Wilmington Trust is a “corporate fiction” after the M&T acquisition, no longer a standalone entity. He said a better test of the Justice Department’s resolve is whether the government is willing to indict a big, powerful bank for the sort of disclosure violations Wilmington is accused of. So far, Kelleher said, Justice has failed that test.

According to the U.S. attorney’s office, Wilmington Trust is represented by Brendan Sullivan of Williams & Connolly and Christopher Gunther of Skadden Arps Slate Meagher & Flom. I emailed Gunther but didn’t hear back.

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