Felony Banking in the First Degree

prison bar shadow

The last time a major U.S. bank plead guilty to criminal charges, the movie Beetlejuice was in theaters. The year was 1988 and the once high-flying firm of Drexel Burnham Lambert, as a corporation, plead guilty to six counts of mail and securities fraud in the largest corporate fraud case to that time. (In the actual agreement Drexel only agreed that it was “not in a position to dispute the allegations”.) Within two years, the stigma and fines associated with the charges caused the firm to file for bankruptcy. Drexel was the last major U.S. financial corporation adjudicated to be a felon.

That may be changing.

The ongoing investigation into manipulation and collusion in the foreign exchange markets is reaching a critical juncture. Last month the South District of New York denied the motion to dismiss civil charges in the consolidated Foreign Exchange Benchmark Antitrust Litigation. Meanwhile, the criminal investigation has taken a surprising turn.

Multiple sources are reporting that the Department of Justice is pushing hard for a number of major U.S. banks to plead guilty to charges that they manipulated or colluded in the foreign exchange market. Post-Drexel, it has been widely accepted that a guilty plea to felony criminal charges would be a death sentence for a major financial institution. However, last year, two foreign banks plead guilty to felony fraud charges related to aiding tax evasion.   The markets have not punished those banks as a result, and now regulators appear less concerned that forcing a criminal guilty plea will be a death sentence for large U.S. firms.

Criminal Watershed?

Guilty pleas in the current foreign exchange matter could be a watershed event and potentially clear the way for regular criminal proceedings against U.S. financial firms for a variety of wrongdoings.  While the markets have been largely forgiving of banks’ ‘mea cuplas’, the question remains how will the plaintiff’s bar respond? Banks agreeing to settlement with government regulators by pleading guilty to criminal charges could be providing substantial ammunition to future civil litigation, but may have little choice.

Some bankers may wind up wearing stripes as a result of the FX investigations, but now it is the banks themselves that may be admitted felons in the coming weeks, and that may change the regulatory environment for years to come. Plaintiff’s lawyers, risk managers and insurance brokers are sure to be reexamining what a felony guilty plea will mean for financial institutions, after all, that part of their policy might be book-marked with a Beetlejuice movie ticket.

About Richard Magrann-Wells

Richard is a Executive Vice President with Willis Towers Watson’s Financial Institutions Group based in Los Angel…
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