Credit Suisse $2.6 Billion Deal Gives Judge Few Options

Credit Suisse AG’s $2.6 billion plea bargain resolving allegations it helped wealthy Americans avoid paying taxes faces a final hurdle from a federal judge who will decide whether to accept it or throw it out.

The first global banking unit in more than a decade to plead guilty to a crime in a U.S. court, Zurich-based Credit Suisse, is slated to be sentenced today by U.S. District Judge Rebecca Beach Smith in Norfolk, Virginia. Under the agreement prosecutors reached with the bank, the judge is bound to either impose the terms as the sentence or throw out the entire deal, according to the government.

It’s unusual for such plea agreements to be thrown out, although a judge “does have some discretion” to reject a deal if it’s “unsupported or against the public interest,” said Brandon L. Garrett, a University of Virginia law professor and author of “Too Big to Jail: How Prosecutors Compromise with Corporations.”

A criminal conviction could disqualify Credit Suisse from handling pension assets valued at billions of dollars, according a July court filing by the bank. The Labor Department is reviewing whether to let the bank continue to serve as a so-called qualified professional asset manager, following its guilty plea to one count of conspiracy to engage in tax fraud.

The department scheduled a Jan. 15 hearing on the issue.

Tax Conspiracy

For decades, Credit Suisse and two subsidiaries conspired to help customers file false tax information to the U.S. Internal Revenue Service in part through the use of sham entities to conceal the identities of account owners, the bank admitted in court filings in May.

The case came amid a crackdown by U.S. officials on offshore tax evasion and signaled a tougher posture toward banks by the Justice Department, which has faced public criticism for failing to prosecute financial institutions over their role in the 2008 economic crisis.

Still, the government sought to limit fallout from a criminal conviction on the financial system, a person briefed on the conversations said in May.

Denying Business

“We understood that the idea behind the criminal prosecution by Justice” of Credit Suisse “was that the punishment would not involve denial of business,” Roy C. Smith, a finance professor at New York University, said in an e-mail. Denying the bank the ability to do business would be “very consequential,” he said.

Prosecutors have been reluctant to criminally charge large companies after the Justice Department’s 2002 indictment of Arthur Andersen LLP caused the accounting firm to collapse and put 85,000 people out of work.

The plea deal provides for penalties of $1.8 billion for the U.S. Treasury, $100 million to the Federal Reserve, and $715 million to the New York State Department of Financial Services, according to the Justice Department. The bank is also subject to monitoring on behalf of the New York regulator. The monitor is Neil Barofsky, a former inspector general for the Troubled Asset Relief Program.

Tough as Nails

Before being selected as monitor, Barofsky said in May that the government “wants to be perceived as tough as nails while avoiding the collapse of a too-big-to-fail institution and other consequences.”

Hundreds of asset managers hold the qualified professional asset manager designation, allowing them to invest pension funds in real estate, private equity and other relatively illiquid assets that can otherwise be blocked by potential “party in interest” conflicts. Firms that commit certain crimes are disqualified as a QPAM without a waiver.

At least six large banks have won waivers to keep their QPAM designations in the past 15 years, including Switzerland’s largest bank, UBS AG, after a unit in Japan pleaded guilty to wire fraud over allegations it manipulated benchmark interest rates. The department earlier granted Credit Suisse a temporary one-year waiver to avert possible retirement plan disruptions.

The case is U.S. v. Credit Suisse AG, 14-cr-188, U.S. District Court, Eastern District of Virginia, (Alexandria).

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