For those folks who remember the implosion of Enron in October 2001, they may also remember the collapse of its international accounting firm Arthur Anderson. The short version of the story is that when Enron’s financial scandal broke, Arthur Anderson’s management sent a missive to staff gently reminding them of the company’s “document retention” policies. This was interpreted by most as a not-so-subtle instruction to start shredding Enron paperwork, which they dutifully did.
In March 2002, the firm was indicted for obstruction of justice and in June it was found guilty. It was required to give up its accounting licenses, since the SEC isn’t too keen on accepting audited financial statements from convicted felons. That was the end of A.A., one of the country’s “Big Five” accounting firms. However, it appears the company died in vain, as the conviction was later overturned by the U.S, Supreme Court in 2005; but by then, it existed in name only, having lost its reputation, all of its clients, and its 85,000 employees.
Since that time, the Department of Justice has been fairly gun-shy about indicting large publicly traded companies, given the death sentence dealt out, somewhat prematurely, to Arthur Anderson.
Fast forward to May, 2014. We now learn that Credit Suisse, one of Switzerland’s two largest investment banks – UBS is the other – has pleaded guilty to “conspiring to aid tax evasion” and has been fined $2.6 billion. This is not to say that the bank actually engaged in tax evasion. It didn’t. Rather, it admitted to assisting its American clients to do so. According for a recent Forbes article here, the conviction raises several questions:
Nor is this the first time Credit Suisse has been caught helping customers evade tax. It has a long history of investigations, out-of-court settlements and prosecutions of junior executives in several countries including the US. There seems little justification for letting it off lightly.
So the punishment meted out to Credit Suisse seems strangely inappropriate. Firstly, the fine levied is tiny for a bank the size of Credit Suisse. Yet this is by any standards a serious offense. Why is the fine so small?
Secondly, there have been no criminal charges brought against any of its top executives, although some junior managers have been indicted and more are being investigated. Nor have any of the top executives been banned by the Federal Reserve. Why are the top execs being let off?
Thirdly, there has been no restriction of the Swiss bank’s license to operate in the US. This despite the fact that a convicted felon should not, under federal law, be allowed to provide investment advice. It appears that the law has been waived in this case. Why?
Finally, the names of the US citizens involved will not be released to the US Justice Department. Credit Suisse claimed that the Swiss government would not allow it to release them – though the New York Times says it’s not clear that Credit Suisse actually asked them to do so. But the real puzzle is why diplomatic pressure at government level has not enabled the names to be released so that these criminals (for that is what they are) can be brought to justice. Could it be that the US government itself for some reason doesn’t want these people exposed? If so, why?
The answer – at least in part – is Arthur Anderson still stands as a cautionary tale about fast-track federal prosecutions of large publicly traded corporations. You can be sure that the DOJ and Eric Holder walked a fine line on the Credit Suisse case, wanting to avoid the “too big to jail” moniker by the American public, but also not wanting to end up with an “Arthur Anderson” redux. Undoubtedly, Mr. Holder needed to send a message to the Big Banks, who have been engaging in all manner of shenanigans for the past several years. [For a summary, see my rants posts here, here, here, and here. ~PCQ]
It appears that between the U.S. and Swiss authorities, an accommodation was finally reached for the guilty plea to proceed. Notwithstanding the conviction, it appears that Credit Suisse will be allowed to live another day.
According to the New York Times, here:
Credit Suisse investors shrugged off the impact of the guilty plea. Shares in the bank, Switzerland’s second-largest after UBS, closed up nearly 1 percent in trading in Switzerland and in New York. [Underscore mine. ~PCQ]
On Tuesday, the Credit Suisse top management spread out around the world to calm employees and clients after its felony conviction. Mr. Dougan was in New York while Urs Rohner, the chairman, was in Switzerland and David Mathers, the company’s chief financial officer, was in London.
In call with media and analysts, Mr. Dougan again said the bank took full responsibility for its actions, but emphasized that it had seen little business impact as a result of the plea.
“We have found no instances where clients cannot do business with us,” he said. “Our discussions with clients have been very reassuring and we haven’t seen very many issues at all.”
Conclusion. Perhaps the lack of widespread negative reaction or surprise to the conviction is that the consequences of the guilty plea were thoroughly negotiated before entry. Stockholders were relieved to get it behind them, and Credit Suisse was permitted to remain in business. Secondly, though not something I’ve read – it’s just my opinion – I suspect the DOJ knew it had moved too fast against Arthur Anderson – primarily due to a “guilt by association” link with Enron, which was headquartered in Houston, had cost thousands of local jobs, and billions of dollars to their retirement funds.
The DOJ’s indictment of A.A. was the kill-shot. The company was virtually dead before it hit the ground. By the time of the trial a few months later, A.A. was on life support, and with the conviction, the plug was removed. The court’s reversal three years later overturned nothing but the conviction of a corpse.
Credit Suisse wisely negotiated to avoid the indictment stage of the process, and the DOJ wisely acceded. By the time the conviction was entered, the financial markets had already reacted.
 Enron’s stock lost 94% of its value during the crisis. According to the New York Times: “Through the 401(k) retirement plan, employees chose to put much of their savings in Enron shares, and the company made contributions in company stock as well. But around the time Enron disclosed serious financial problems last month, the company froze the assets in the plan because of an administrative change. For several weeks, as the stock lost much of its value, workers stood by helplessly as their retirement savings evaporated. They were not allowed to switch investments at all — even though the plan had far less risky choices.”