Mixed Signals in a Corporate Felon’s Punishment

Updated, 2:04 p.m. |
There is a new felon on Wall Street – Credit Suisse. Yet for the most part, the bank will be doing business as usual.

The guilty plea the federal government extracted from the bank on Monday was intended to send a clear signal that global financial firms are not “too big to jail.”

Attorney General Eric H. Holder Jr. called Credit Suisse’s guilty plea a “major step forward” in showing that “a company’s profitability or market share can never and will never be used as a shield from prosecution or penalty. And this action should put that misguided notion definitively to rest.”

Still, the government went out of its way to make sure the conviction was not too costly for Credit Suisse. Mr. Holder noted that the Justice Department worked “in close coordination with the bank’s financial regulators” because cases “involving a financial institution have the potential to trigger serious follow-on actions by regulatory agencies.”

The government’s concern with minimizing the collateral consequences almost gives the impression that this was a guilty plea without all the guilt – the equivalent of a diet in which you don’t have to stop eating your favorite foods.

And while the conviction is a significant victory for the Justice Department and other authorities, it remains to be seen whether there will be a change in how the government deals with corporate misconduct.

Unlike criminal cases against individuals, prosecution of a company is more about the symbolism of being held accountable for misconduct by employees than the actual punishment imposed. The legal philosopher H.L.A. Hart wrote that designating conduct as “criminal” means that it “will incur a formal and solemn pronouncement of the moral condemnation of the community.” In that regard, the Justice Department’s decision to seek a guilty plea from Credit Suisse is indeed a public relations move, but one that should carry greater weight than just a civil penalty.

Of course, the mantra of “too big to jail” is a misnomer because no bank or other business could ever be incarcerated, regardless of its size or influence. The Supreme Court once remarked in the criminal antitrust case Melrose Distillers Inc. v. United States that “a corporation cannot be sent to jail. The discharge of its liabilities whether criminal or civil can be effected only by the payment of money.”

Thus, Credit Suisse will pay $2.6 billion in fines and restitution to federal and state authorities for its role in aiding tax evasion, but it will not suffer any other direct criminal punishment for its violation

Credit Suisse was in many ways the perfect major financial institution from which to demand a guilty plea. Although its investment banking and wealth management operations are global, the commercial banking operation in the United States is largely confined to its New York branch, which held about $72 billion in assets in 2013, according to a Federal Reserve report.

It does not own a subsidiary in this country providing bank services to local customers, so it really only had to negotiate with the New York authorities and the federal government to resolve the case. That meant the effort to mitigate potential collateral consequences of a guilty plea was confined to just a few agencies.

To protect its banking license from being revoked, Credit Suisse agreed to pay $715 million to New York’s Department of Financial Services as well as a $100 million penalty to the Federal Reserve, its primary federal regulator. Those payments illustrate the likely cost other banks could face to keep the collateral consequences of a criminal conviction from threatening their ability to stay in business.

There will be ramifications of the guilty plea, as some customers and suppliers will not do business with a firm. But the effect on Credit Suisse’s relationships with Wall Street trading partners will be minimal in all likelihood.

Wall Street may be quick to forgive and go forward with business as usual, especially if Credit Suisse remains a source of profits. And the bank’s current executives have not lost their jobs, at least at this time.

Even Credit Suisse’s chief executive, Brady W. Dougan, has sought to play down the effect. “We have found no instances where clients cannot do business with us,” he said on Tuesday. “Our discussions with clients have been very reassuring and we haven’t seen very many issues at all.”

Mr. Dougan had earlier told a congressional committee that the tax evasion was the work of a small group of private bankers that was hidden from senior management, which gives a hint at how much the bank considers itself responsible for the tax evasion.

The broader question is whether other banks and large corporations will also have to plead guilty when the violation involves serious misconduct, especially in cases in which it will be much more difficult to contain the potential effects of an admission of guilt.

As DealBook reported, JPMorgan Chase and Citigroup are the subject of criminal investigations in different cases. Federal authorities, for instance, are said to have opened a criminal investigation into a recent $400 million fraud involving Citigroup’s Mexican unit.

Whether prosecutors will take the same hard line by demanding a guilty plea from an American bank is not yet clear, especially as those investigations are still at an early stage.

Over the last decade, the Justice Department became quite comfortable with resolving investigations of corporate misconduct through deferred and nonprosecution agreements that require the payment of large fines but do not result in an actual criminal conviction.

There was a slight shift in policy recently in two cases involving the manipulation of the London interbank offered rate, or Libor, when the Japanese subsidiaries of UBS and Royal Bank of Scotland pleaded guilty. While the Justice Department could point to the criminal convictions, their effect was kept to a minimum by having only a foreign entity with no operations in the United States admit to the violation.

The resolution of the Credit Suisse case involves the parent company, not a subsidiary that can be used to absorb the blow. Whether this is a major change in the Justice Department’s approach to corporate criminal liability or just a short-term effort to blunt public criticism with a few guilty pleas by foreign banks remains to be seen.

What is missing from the Justice Department’s proclamation of the end of “too big to jail” is a description of the circumstances that will lead to the same consequences for other companies that have violated the law.

What made the Credit Suisse case appropriate for a guilty plea, or was the bank just in the wrong place at the wrong time? The answer to that question will show whether corporations are truly at risk of criminal prosecution, or can remain secure in the knowledge that there is little real chance of having to suffer the harm that stems from a criminal conviction.