The Swiss banking giant UBS paid a fairly stiff price to settle the rate-rigging case. In addition to approximately $1.5 billion in penalties and disgorgement, the bank's Japanese securities subsidiary pleaded guilty to a charge of felony wire fraud.
As DealBook reported, the guilty plea by the UBS subsidiary is the first time an arm of major financial institution has been convicted of a crime since Drexel Burnham was more than 20 years ago. Although that distinguishes this case from most others, the Justice Department and UBS also structured the settlement to keep the potential fallout from the plea to a minimum.
A guilty plea in a corporate criminal investigation is uncommon, with most cases concluded by a deferre d or nonprosecution agreement. Just last week, HSBC received a deferred prosecution agreement related to money laundering. Barclays struck a deferred prosecution agreement to settle its rate manipulation case.
This is not the first time UBS has been caught up in an investigation of criminal violations. In February 2009, the bank entered into a deferred prosecution agreement over its role in aiding tax evasion by Americans using secret accounts that resulted in $780 million in fines and penalties.
In the rate-manipulation settlement, the parent company received a separate nonprosecution agre ement, which will be in effect for two years, after which the criminal investigation will be closed without any charges being filed. Under this type of arrangement, the bank does not suffer the embarrassment of having charges made public while prosecutors hold them in abeyance.
UBS was required to accept a statement of facts outlining its misconduct, which will be useful to private plaintiffs. More important, the nonprosecution agreement does not affect the bank's ability to continue to do business in the United States in the same way a criminal conviction could because the parent company will be able to keep its charter.
The Japanese subsidiary, where much of the manipulation involving the yen-denominated London interbank offered rate, or Libor, occurred, does not have any operations in the United States and so is not subject to direct regulation in this country. Its criminal conviction will not have a direct effect on UBS's operations here.
The impact in Japan on the UBS subsidiary also is likely to be minimal. The Financial Services Agency, which oversees Japanese banks and securities firms, issued an administrative order in December 2011 sanctioning UBS Securities Japan for manipulation of the yen-denominated Libor. The action included a 1-week suspension from derivatives transactions and an agreement to improve its compliance measures. The Japanese authorities might revisit the case, but it appears they have already disposed of the matter.
One concern that has been expressed about pursuing criminal charges in the United States against global companies in heavily regulated industries like banking is the potentially devastating impact a conviction could ha ve on their operations. If a large bank were suddenly put out of business, the financial system might be substantially harmed because it has become so interdependent, not to mention the loss of jobs and threat to investments.
This is the fear of the “Arthur Andersen†effect, named after the accounting firm that went out of business in 2002 when it was convicted of obstruction of justice related to auditing work for Enron. Since its demise, federal prosecutors have relied primarily on deferred and nonprosecution agreements to resolve corporate criminal investigations. Even when the Justice Department obtains a guilty plea as part of the resolution of a corporate criminal investigation, it has structured the case to minimize the collateral consequences to the company from a conviction.
For example, in the hea lth care area, the government has allowed nonoperating subsidiaries â€" basically corporate shells â€" to be the defendant pleading guilty while the parent company is involved only in a civil settlement or, as with UBS, enters into a deferred or nonprosecution agreement.
In 2009, Pfizer agreed to a $2.3 billion settlement for illegal promotion of its products in which its Pharmacia & Upjohn subsidiary, which had ceased operations years earlier, pleaded guilty. Earlier this year, GlaxoSmithKline, which is incorporated in Britain, paid $3 billion as part of a settlement for unlawful promotion of its drugs while a Delaware limited liability company it owned pleaded guilty.
One reason health care companies need to avoid a criminal conviction is that certain violations result in an automatic five-year exclusion from participating in Medicare and Medicaid. That would have a devastating effect on a drug company. So the settlements have a nonoperating subsidiary bear the consequences of the conviction while the parent stays in business.
Using the Japanese subsidiary as the vehicle for the guilty plea spares UBS from having its operations in other countries hampered. In addition to the Justice Department, one of the parties to the settlement is the Commodity Futures Trading Commission, which imposed $700 million of the $1.5 billion in penalties. As such, UBS is likely to have resolved its dealings with the federal government.
The bank is not immune from further enforcement activity in the United States, however. As Standard Chartered learned recently when it had to settle a claim filed by the New York State Department of Financial Services by paying $340 million, state regulators may want their own payments for violation of banking laws.
UBS has branches in New York and Connecticut with billions of dollars in assets, so it would not be a surprise if authorities in those states raise questions over its manipulation of Libor and perhaps seek their own pound of flesh from the bank.
The Justice Department has upped the ante for other banks involved in the Libor investigation by including criminal charges rather than just employing a deferred or nonprosecution agreement. Although UBS did everything it could to avoid pleading guilty, in the end the Justice Department held firm.
It will be interesting to see if a guilty plea has become the price of a settlement with federal prosecutors. If so, that may not bode well for other banks involved in the investigation.
