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TOO BIG TO JAIL?

By Curtis C. Verschoor, CMA, CPA
October 1, 2015
3 comments
10ethics_web

Banks and financial companies are being prosecuted and penalized for large-scale frauds and unethical actions, but the people behind these events still aren’t facing jail time.

 

In May, five global banks—Citigroup, JPMorgan Chase, Barclays, the Royal Bank of Scotland, and UBS—agreed to pay approximately $5.6 billion in penalties for antitrust violations in the foreign exchange market. This comes after some of these banks already agreed to pay regulators $4.3 billion last November. In a chatroom where one of the schemes was hatched, one trader wrote, “If you ain’t cheating, you ain’t trying.” Though four banks pleaded guilty to criminal charges, no individual was sentenced to serve prison time.

 

A New York Times timeline, “Tracking Criminal Inquiries of Wall St. Giants,” which depicts 30 years of criminal investigations of Wall Street wrongdoing, notes that “A lack of criminal prosecutions of banks and their leaders fueled a public outcry over the perception that Wall Street giants are ‘too big to jail.’” While the list of criminal investigations and suspected wrongdoing is upsetting, it’s made all the worse considering how few, if any, individuals were held responsible for their contributions to the illegal events.

 

The timeline begins in May 1985, when E.F. Hutton paid a $2 million fine for a fraud that allowed the bank to use millions of bank funds without paying interest. Next is December 1988, when Drexel Burnham Lambert Inc. pleaded guilty to six felony counts and paid $650 million, the then-largest settlement of securities fraud charges. The investment banking firm is credited with “creating the modern junk bond market.” Wall Street speculator Ivan Boesky, the main witness against Drexel, went to prison after settling insider trading charges, but no officers from Drexel served jail time.

 

As the years go on, the fines increase, but few individuals are held accountable. In May 1992, Salomon Brothers paid $290 million to settle charges that it submitted phony bids in government bond auctions. In March 1999, Bankers Trust paid $63.5 million in fines for diverting uncashed checks and other unclaimed client property into its own books. Neither the Salomon Brothers nor Bankers Trust case resulted in prison time for any company officer.

 

In November 2004, the global insurance giant American International Group (AIG) agreed to pay penalties and restitution of $126 million. The investigation led to a $3.9 billion restatement of AIG’s financial statements. Then-CEO Maurice Greenburg also transferred stock worth $2.6 billion to his wife before resigning. No AIG officers served time.

 

Under the terms of a deferred prosecution agreement in February 2009, UBS, the largest bank in Switzerland, agreed to release to the IRS the names of wealthy Americans suspected of tax evasion and to pay a fine of $780 million. UBS’s penalties could have reached $1 billion but were mitigated by prosecutors because of the banking crisis and recession. In a similar case in May 2014, Swiss bank Credit Suisse pleaded guilty to assisting in tax evasion and paid $2.6 billion in penalties. No one from UBS or Credit Suisse was prosecuted.

 

In June 2012, the British bank Barclays agreed to pay $450 million to settle claims that it had acted to manipulate the London Interbank Offering Rate (LIBOR) to benefit its own bottom line. No individuals were charged. In fact, the first criminal conviction related to LIBOR cases didn’t occur until August 2015, when former UBS and Citigroup trader Tom Hayes was sentenced to 14 years in prison for conspiring to manipulate LIBOR. Hayes argued his behavior was “in line with industry standards, that his bosses knew about and condoned what he was doing, and that he never realized his behavior was improper.”

 

In December 2012, authorities accusing HSBC bank of criminal money laundering backed off because “criminal charges could jeopardize one of the world’s largest banks and ultimately destabilize the global financial system.” This is the “too big to indict” phenomenon. Instead, the bank accepted a deferred prosecution agreement without prison time and paid a settlement of about $1.9 billion.

 

In January 2014, JPMorgan Chase avoided a guilty plea for failing to alert authorities of suspicious activities in the Bernie Madoff Ponzi scheme. Instead, the bank negotiated a deferred-prosecution agreement, paying more than $2 billion in penalties. Including the $13 billion settlement JPMorgan made with the government over sale of potentially fraudulent mortgage products, the bank has paid a total of $20 billion in penalties to resolve the criminal investigations. Yet still no officers have faced jail time.

 

These were only some of the cases listed in the timeline. The total amount paid in fines and penalties is huge, but it still doesn’t seem to deter wrongful behavior on Wall Street. As noted in my August 2015 Ethics column, 47% of respondents to a banking and finance survey believe their competitors have engaged in unethical or illegal activity in order to gain an edge. The attitude of “behavior is ethical if I can get away with it” must change.

 

Only stronger enforcement and more vigorous criminal prosecution seem to be a viable option to deter fraud. The U.S. Justice Department issued a memo in September 2015 describing a new policy that gives priority to the prosecution of individual wrongdoers, not just companies. In settlement negotiations, companies won’t be able to obtain credit for cooperating with the government unless they identify employees and turn over evidence against them, “regardless of their position, status, or seniority,” according to a New York Times story. Sally Q. Yates, the deputy attorney general and the author of the memo, said in an interview, “Corporations can only commit crimes through flesh-and-blood people.” The New York Times characterizes the memo as a tacit acknowledgment that the government has “punished few executives involved in the housing crisis, the financial meltdown and corporate scandals.”

 

IMA ETHICS HELPLINE

 

For clarification of how the IMA Statement of Ethical Professional Practice applies to your ethical dilemma, contact the IMA Ethics Helpline.

 

In the U.S. or Canada, dial (800) 245-1383. In other countries, dial the AT&T USA Direct Access Number from www.usa.att.com/traveler/index.jsp, then the above number.

 

The IMA Helpline is designed to provide clarification of provisions in the Statement of Ethical Professional Practice, which contains suggestions on how to resolve ethical conflicts. The helpline cannot be considered a hotline to report specific suspected ethical violations.

 

Curtis C. Verschoor, CMA, CPA, is the Emeritus Ledger & Quill Research Professor, School of Accountancy and MIS, and an honorary Senior Wicklander Research Fellow in the Institute for Business and Professional Ethics, both at DePaul University, Chicago. He also is a Research Scholar in the Center for Business Ethics at Bentley University, Waltham, Mass., and chair of IMA’s Ethics Committee. Trust Across America-Trust Around the World awarded him a Lifetime Achievement Award in 2016 as a top thought leader in trustworthy business. His e-mail address is curtisverschoor@sbcglobal.net.
3 + Show Comments

3 comments
    paul October 9, 2015 AT 12:35 pm

    how is the VW situation any different than this? at its essence, there is no difference. did everyone feel duped by chase and move their money elsewhere? where are the class action suit? maybe vw didn’t spend enough in Washington dc? we as management accountants, cfo’s, controllers, etc. need to say “enough” we are not doing that. Take a stand today. we are all behind you.

    DAVID CHRISTENSEN October 9, 2015 AT 3:40 pm

    What is the full citation of the New York Times publication?

    sfadmin October 13, 2015 AT 9:22 am

    Here is the NY TImes article: http://www.nytimes.com/interactive/2014/05/19/business/dealbook/20bank-timeline.html#/#time326_8666

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