It’s been almost two weeks since the Department of Justice announced its plea agreements in the Forex investigation. To recap the highlights, in his remarks announcing the case filings, Bill Baer Assistant Attorney General for the Antitrust Division said (here):
Today’s guilty pleas to criminal charges represent major developments in our investigation into collusion affecting foreign exchange markets, particularly the spot market for trading U.S. dollars and euros. The antitrust guilty pleas announced today involving four major international financial institutions – Citicorp, JPMorgan Chase, The Royal Bank of Scotland and Barclays – are without precedent. In light of the seriousness of the crimes and the unjustified benefit to the bottom lines of these banks, we demanded parent-level guilty pleas, secured record fines of more than $2.5 billion and insisted upon three years of court-supervised probation.
In addition, UBS agreed to plead guilty to a violation in the Libor market. UBS had previously received non-prosecution protection in the Libor investigation, but that protection was withdrawn in light of UBS’s participation in the Forex cartel.
Since the news of the case filings first broke, I’ve had some additional thoughts on the matter. First, I want to give a big pat on the back to my former colleague, Joe Muoio, who signed the pleadings on behalf of the Antitrust Division. Joe and I worked together for many years in the now closed Philadelphia Field office. Joe was the Assistant Chief and transferred to the New York Field office when the Philadelphia office was closed in 2013. The Forex investigation was a team effort (a large international team, no doubt) and there could not have a better team leader than Joe. Congratulations to Joe and the rest of the team.
The Forex plea agreements have two noteworthy departures from previous pleas in the financial sector. For the first time, the Antitrust Division acknowledged giving credit to a company for implementing an effective compliance program after the start of the investigation. Little has been revealed about what made Barclay’s compliance program effective, why the Division chose to give credit in this case, and what the value of the credit given to Barclays was? The plea agreements states only: “The parties further agree that Recommended Sentence is sufficient, but not greater than necessary to comply with the purposes set forth in 18 U.S.C. §§ 3553(a), 3572(a), in considering, among other factors, the substantial improvements to the defendant’s compliance and remediation program to prevent recurrence of the charged offense.” This language, while limited, is still an important first step for the Antitrust Division to acknowledge (and thereby encourage) implementation of effective antitrust compliance programs. The Antitrust Division does not make changes in policy lightly and it is likely they will have more to say about this development in future speeches.
Another noteworthy fact about the Forex plea agreements is that the Antitrust Division required pleas from the parent company. Previously, in most situations where financial institutions have been charged in Forex and Libor, the plea has come from a foreign subsidiary to avoid the collateral consequences that would flow from a conviction of a publicly traded company. Requiring the parent to plead was a relatively small step, however, as the pleas were only entered after waivers were secured from the SEC. The banks wanted assurances from U.S. regulators that they would not be barred from certain businesses before agreeing to plead guilty to criminal charges. (here). The defendants received the desired waivers.
The historic pleas have not been without some public criticism. An example is an editorial in the New York Times titled: “Banks as Felons, Or Criminality Lite”
Besides the criminal label, however, nothing much has changed for the banks. And that means nothing much has changed for the public. There is no meaningful accountability in the plea deals and, by extension, no meaningful deterrence from future wrongdoing.”
SEC Commission, Kara M. Stein, was harsh in her dissent from the grant of waivers to the recidivist banks.
Allowing these institutions to continue business as usual, after multiple and serious regulatory and criminal violations, poses risks to investors and the American public that are being ignored. It is not sufficient to look at each waiver request in a vacuum.
And, in an article in USA Today (here), four leading antitrust commentators who are not usually found to be in agreement (Judge Douglas Ginsburg, FTC Commission Josh Wright and Albert Foer and Professor Robert H. Lande of the American Antitrust Institute) called for harsher penalties against individuals convicted of antitrust offenses.
Some thoughts on Compliance
As already noted, the Antitrust Division took a big step forward in encouraging the implementation of effective compliance programs. Hopefully, more details will be forthcoming about why now? What was it about Barclays’ program that was considered effective? And what was the monetary benefit for the compliance program.
The Division’s encouragement of an effective compliance program should be bolstered by the sheer magnitude of the fines and other consequences of these guilty pleas. In the compliance world, FCPA is “Top Dog” in terms of compliance resources and attention. No doubt issues like vetting third-party vendors worldwide rightfully account for this attention. But the consequences of an antitrust offense call out for an equally keen focus on antitrust compliance. I’ve written about this before (here), but the combination of huge fines, jails sentences for individuals, investigation by multiple U.S. agencies, and competition agencies around the world, and the significant damages paid out in civil class action lawsuits make a compelling case for robust antitrust compliance efforts.
Indeed, the Antitrust Division’s plea agreements with the other banks besides Barclays call for devoting resources to compliance programs:
“The defendant shall implement and shall continue to implement a compliance program designed to prevent and detect the conduct set forth in Paragraph 4 (g)-(i) above and, absent appropriate disclosure, the conduct in Paragraph 13 below throughout its operations including those of its affiliates and subsidiaries and provide an annual report to the probation officer and the United States on its progress in implementing the program, commencing on a schedule agreed to by the parties.”
The plea agreements, however, do not call for external compliance monitors. Given that the cartel involved billions of dollars, the brazen nature of the crime (the conspirators referred to themselves in private chat rooms as the “Cartel Club” and “The Mafia,” and finally, the degree of recidivism, one wonders (OK, I wonder) why no external compliance monitors? The Division sought (and received from the court) external compliance monitors in the Apple case, (a civil violation) and in AU Optronics (a first offense). Unless the Antitrust Division provides further guidance, it appears that the only criteria for seeking an external monitor is if a company goes to trial against the Division and loses.
The Investigation Is Ongoing
There is some validity to the charge that the corporate fines are just a cost of doing business and don’t provide sufficient deterrent. Perhaps requiring a parent to plead was one step closer towards requiring a plea and no regulatory waivers. But fears of collateral damage to innocent employees (who would lose jobs), stockholders (who could be wiped out) and the economy in general make this a hard trigger to pull. The real deterrent comes with prosecution of individuals—i.e., the guys in The Cartel or The Mafia, as they put it. It is extremely likely that the Antitrust Division will seek charges against individuals in this case. The hard part is not so much prosecuting the traders who operated in the chat rooms and left a trail of evidence, but in determining if knowledge of the cartel went higher up in the banks. Holding the highest-level person in an organization responsible for the crime is the highest deterrence. But, this is challenging as superiors are often shielded from direct involvement in the crime and can only be convicted on the basis of the testimony of subordinates whose credibility may be compromised by their own plea. The public often cries for higher level executives to be held accountable, but juries take seriously their obligation to convict only where the proof establishes guilt “beyond a reasonable doubt.”
There will be much more to this story so stay tuned. Thanks for reading.