U.S. regulators are investigating whether Credit Suisse Group AG (CSGN) improperly shifted money in its private banking unit to obscure a drop in asset growth amid a U.S. probe of tax evasion at Swiss banks, a person familiar with the matter said.
The Securities and Exchange Commission began investigating the conduct last year, said the person, who asked not to be identified because the matter isn’t public. The bank is also conducting an internal investigation to determine whether it violated accounting rules in the U.S. or Switzerland, according to a Senate report released yesterday.
“We’re going to look into the whole process and take whatever measures we have to take,” Credit Suisse Chief Executive Officer Brady Dougan said today at a Senate hearing. “We believe it’s a process that’s had integrity, but we’ll take a look and make any changes we need to make to it.”
Credit Suisse touted the amount of “net new assets,” or net cash inflows, to its private banking business as a key gauge of the lender’s ability to generate earnings, the Senate Permanent Subcommittee on Investigations said in the report. Those inflows began to dry up in 2011 and 2012 as Swiss banks faced growing scrutiny for helping tax evaders, according to an internal e-mail cited by the report.
Credit Suisse shares were down 2.9 percent to $30.70 at 1:28 p.m. in New York.
Credit Suisse didn’t follow its own policies for determining the value of new assets, and shifted them between regions to hide a decline in the Switzerland-based unit, the subcommittee said. Dougan acknowledged in a December interview with the subcommittee that the Zurich-based bank may not have followed those policies in at least one instance, according to the Senate report.
Romeo Cerutti, the bank’s general counsel, said in the hearing today that at this point there’s no evidence that the net new asset numbers reported to investors were inaccurate.
“It’s a very bad sign when a company sets up a policy and then ignores it,” said Lynn Turner, a former chief accountant at the SEC.
Deborah Primiano, a spokeswoman for KPMG LLP, the bank’s auditor, declined immediate comment.
The subcommittee, led by Michigan Democrat Carl Levin, published the report yesterday detailing Credit Suisse’s role in aiding American tax evasion. The subcommittee held a hearing today attended by Dougan, three other bank executives and two Justice Department officials.
Credit Suisse reports net new assets each quarter. The figure is a key metric used to judge the health of the bank, showing the ability to earn income from managing client assets, the report said, citing an interview with Philip Vasan, head of private banking Americas at Credit Suisse.
The private banking unit had a target of increasing net new assets by 6 percent, according to a 2009 Credit Suisse presentation cited by the Senate report. Within two years, asset growth was declining. The inflows slowed in each quarter of 2011 and followed the same trend in early 2012, an internal e-mail cited by the report shows.
At that time, a Swiss customer living in the U.S. -- referred to in the report as Client 5 -- sold an investment worth as much as 8 billion Swiss francs ($9 billion). He told the bank he would convert the funds to cash and investments in publicly traded securities, the Senate report says.
Before Credit Suisse could account for the funds as new assets under management, it should have had a signed agreement with the customer, which it didn’t have, according to several executives interviewed by the committee. Nevertheless, the bank classified about 4.3 billion Swiss francs of Client 5’s funds as net new assets, raising the total for wealth management to 5.8 billion Swiss francs for the first quarter of 2012.
One executive, Carlos Onis, said the agreement wasn’t required for the accounting move.
At the end of that year, the bank reclassified another 900 million Swiss francs of Client 5’s money, even though most of it hadn’t been invested, the report says. Rolf Boegli, former chief operating officer of the Swiss private banking operation, said the funds “would be a great favor for our division,” according to an e-mail cited in the Senate report.
Credit Suisse said Swiss law firm Schellenberg Wittmer and U.S. law firm Simpson Thacher & Bartlett are conducting a review for the bank of the internal process relating to net new assets to ensure compliance with the Swiss rules and the bank’s internal policy.
Dougan, in the December interview, called Boegli’s e-mail “disturbing” and “very objectionable,” according to the Senate report. Dougan said the decision to reclassify assets based on a desire to help the appearance of the private banking division’s financial condition didn’t seem to follow the bank’s principles.
Dougan said he “relies on the process and people who make sure this is done right,” according to the report.