When JPMorgan Chase & Co.’s Jamie Dimon got a 74 percent raise in January, U.S. Attorney Preet Bharara fumed. He had forced the bank just weeks before to pay $1.7 billion for enabling Bernard Madoff’s Ponzi scheme. And yet Dimon was being rewarded.
Now, five months later, Bharara’s frustration is directed at another bank.
In the next few weeks, BNP Paribas SA could face criminal charges and a fine of up to $10 billion for doing business in sanctioned countries such as Iran and Sudan. That penalty would far exceed the fines incurred by six other banks that escaped criminal charges for similar offenses since President Barack Obama took office in 2009 -- and would be the largest-ever criminal penalty in the U.S.
The potential severity in BNP’s case stems in part from Bharara’s determination to punish banks that have repeatedly evaded harsher penalties by warning that a wave of unforeseen consequences could result. It also reflects the egregiousness of BNP’s conduct and the bank’s apparently slow response to the U.S. investigation during its early stages, according to two people familiar with the matter. The case has strained relations between the U.S. and France, with French President Francois Hollande set to confront Obama today at a Paris dinner over what he says is a threat to his country’s financial system.
This story, the result of interviews with more than two dozen people with knowledge of the BNP investigation, illustrates how France’s largest bank became the target of the U.S. in its effort to show that large financial institutions shouldn’t expect special treatment under the law. It also describes a previously unreported letter that shows prosecutors’ dissatisfaction with the bank’s cooperation.
Spokesmen for BNP and Bharara’s office declined to comment for this story, as did spokesmen for New York’s Department of Financial Services and the Manhattan District Attorney, which are also involved in the investigation.
The Dimon connection goes back to last fall, when Bharara was threatening to file a criminal charge against JPMorgan on the theory that it should have kept a closer eye on Madoff’s account.
Dimon, the chief executive officer, met with Bharara and urged the prosecutor to rethink his position. Lawyers from Wachtell Lipton Rosen & Katz and Sullivan & Cromwell LLP argued that no financial institution could withstand an unresolved criminal charge.
Bharara relented and decided to go with a deferred prosecution agreement, under which the bank would be monitored for future compliance. JPMorgan’s lawyers also pushed back in vain, arguing that no crime had been committed.
A few weeks after the Jan. 7 settlement, the board raised Dimon’s pay to $20 million for his 2013 work, reversing a pay cut he took a year earlier after the bank posted a multibillion-dollar trading loss. The board may decide in the coming month whether Dimon can collect stock options granted in 2008 and are now valued at about $33 million.
The bank’s board justified Dimon’s raise, in part, by crediting him with “the steps the company has taken to resolve” the regulatory issues facing the bank.
Bharara, who seethed over the raise and its justification, then took the unusual step of writing a letter to JPMorgan’s lawyers, pointing out that the settlement hadn’t led to any dire consequences for the bank or markets, said two people familiar with the letter.
The letter went to Stephen Cutler, JPMorgan’s general counsel, and the bank’s outside lawyers at Sullivan & Cromwell and Wachtell Lipton, according to the people.
Brian Marchiony, a spokesman for JPMorgan, declined to comment, as did spokesmen for Sullivan & Cromwell and Wachtell Lipton.
In a March 31 speech, Bharara aired his frustration publicly.
“This repeated Chicken Little routine, I will tell you, begins to wear thin,” he said.
The BNP Paribas investigation began around 2007, when an informant contacted the Manhattan District Attorney’s office with information on specific transactions, according to the two people with knowledge of the probe who asked not to be identified because the matter is private.
At issue was whether the bank had breached the International Emergency Economic Powers Act, which allows the U.S. to place economic sanctions on countries deemed to be sponsors of terrorism. It was apparent early that the case, which involves BNP transferring dollars for clients into and out of the U.S., would be big, one of the people said.
BNP’s lead American lawyer at the time was Robert Bennett, a well-known figure in Washington who had represented former President Bill Clinton and a host of other prominent clients.
Over several meetings at the District Attorney’s office in lower Manhattan, Bennett and attorneys from Skadden Arps Slate Meagher & Flom LLP and Cleary Gottlieb Steen & Hamilton LLP fielded questions about transactions facilitated by the bank for clients in Iran, Sudan and elsewhere. Bennett said his client was unaware of any wrongful conduct, though he would check further, said two people with knowledge of the matter.
Spokesmen for the law firms declined to comment.
BNP’s management team in Paris didn’t consider its transactions on behalf of clients in Sudan to be wrongful because they didn’t break any French or European Union laws, according to a different person briefed on the matter. Bank of France Governor Christian Noyer agreed with that assessment in May.
To signal good faith, BNP told U.S. authorities in 2009 that it intended to cooperate with the investigation, said two people with knowledge of the matter.
Meanwhile, as the Manhattan District Attorney’s office moved forward with the investigation, Bharara persuaded his superiors at the Justice Department to allow his office to take a bigger role. Starting around 2010, Bharara’s team, headed by Andrew Goldstein, joined prosecutors from the office of Manhattan D.A. Cyrus R. Vance, Jr.
Benjamin Lawsky, New York’s top banking regulator, broke ranks with other authorities in August 2012 after growing frustrated with the slow pace of talks in a sanctions case against London-based Standard Chartered Bank plc. Lawsky issued a public letter outlining the scope of the problematic transactions and demanding to know why he shouldn’t revoke Standard Chartered’s license to operate in New York.
Officials at the DA’s office, the Federal Reserve, Treasury and Justice Department fumed over Lawsky’s actions, which had upstaged and embarrassed them, according to people briefed on the matter at that time. Standard Chartered settled with Lawsky that month for $340 million and agreed to hire a monitor. The other regulators wound up with a smaller settlement -- $327 million -- four months later.
Standard Chartered became the sixth major European bank to settle such a case with the Justice Department since 2007, when the U.S. started cracking down on sanctions violations. Each bank had paid several hundred million dollars to settle the cases as part of deferred prosecution agreements.
Lawsky’s move increased prosecutors’ sense of urgency with sanctions cases. Bharara reached out to the state regulator, whom he had known when they were both assistant U.S. Attorneys in Manhattan, according to two people familiar with the matter.
Lawsky told Bharara he wasn’t planning any pre-emptive action in the BNP case, provided it was being pursued in a serious manner. Bharara assured Lawsky that he would. He also expressed disapproval of previous settlements that appeared to rely heavily on material supplied by the banks and their law firms, rather than investigators’ own findings.
Government investigators, working with the Federal Bureau of Investigation’s New York office, soon learned of new problems at BNP. Investigators found that problematic transactions between the bank’s European offices and Sudan had continued into 2011, after the probe had begun, even though BNP had said the incidents occurred from 2002 to 2009.
Prosecutors then sent a stern letter to BNP, warning that they viewed the bank as uncooperative, said three people briefed on the matter.
The letter shocked the bank’s management in Paris, according to one of the people. In mid-2013, the bank hired Sullivan & Cromwell as lead counsel in the matter, replacing Bennett, whose team was relegated to secondary status. Karen Patton Seymour, a former federal prosecutor best known for winning a criminal conviction against Martha Stewart in 2004, became BNP’s primary point of contact with the government.
The law firm pledged immediate and complete cooperation. Throughout the second half of 2013 Seymour responded quickly to requests from prosecutors. In December, the law firm’s senior chairman, Rodgin Cohen, who had brokered several of the previous sanctions settlements involving European banks, took an active role in the BNP case.
By this time, prosecutors were leaning toward filing criminal charges. The amount of BNP’s suspicious transactions in U.S. dollars exceeded the combined amount in six past similar sanctions cases, according to two people familiar with the matter.
The bank was also slow to make changes in response to the investigation. BNP had promoted Dominique Remy, who had run BNP’s energy and commodity finance unit in Geneva. That unit, which has fired, allowed to resign or relocated 30 people since 2012, has been one source of the alleged transaction violations.
The bank has only recently begun to come to terms with prosecutors’ demands. On a trip to New York early last month, BNP executives and lawyers sought advice from other companies that had been subjected to the political and media maelstrom that often follows high-profile government investigations, according to a person who attended a meeting with BNP.
The bank, said the person who asked for anonymity, seemed unprepared to deal with any public fallout that would accompany a deal with prosecutors. In addition, BNP executives were confident that they could avoid a guilty plea by paying a steep fine, even though prosecutors had made clear several times a conviction would be part of any settlement, the person said.
Since then, French officials have become more vocal, publicly calling on the U.S. for leniency. Obama said today that he won’t interfere with the case.
“The tradition of the United States is that the president does not meddle in prosecutions,” Obama said in response to a question at a press conference in Brussels. “I do not pick up the phone and tell the attorney general how to prosecute cases.”
Lawsky also wants to suspend BNP’s dollar clearing operations in New York, according to a person familiar with the matter. The potential punishment has become a sticking point in the negotiations, the person said.
He is also planning to identify by name more than a dozen current and former BNP employees who were allegedly involved in the transactions. Lawsky was concerned enough about BNP’s practices that he installed a monitor, Shirah Neiman, at the bank’s New York offices late last year, according to a person familiar with the matter. The New York Times previously reported that BNP has a monitor.
In his March speech, Bharara signaled that he no longer believed the dire warnings of unforeseen consequences of a criminal charge against banks.
“What I have found typically is that, in reality, as we had suspected, the sky does not fall,” he said. “In fact, sometimes the sky brightens: stock prices remain steady, or go up, as the company is viewed as putting problems ’behind it;’ clients and customers and key employees don’t even bat an eye; and sometimes, the CEO even gets a raise.”