HSBC Monitor Report Will Remain Sealed, Appeals Court Rules

Updated on
  • Lower court shouldn’t have agreed to unseal document: ruling
  • Report measured compliance with deferred-prosecution agreement

A monitor’s report detailing HSBC Holdings Plc’s compliance with a 2012 agreement with U.S. prosecutors to fix faulty money-laundering controls isn’t a judicial document and shouldn’t be made public, a federal appeals court said Wednesday.

U.S. District Judge John Gleeson had ordered the report to be made public in 2016, while criticizing the government’s attempt to keep it under seal. The Brooklyn, New York, judge found that the report qualified as a judicial record that needed to be filed publicly, but it remained out of public view while his decision was appealed.

HSBC agreed to improve its internal controls in late 2012 as part of a $1.9 billion deferred-prosecution agreement with U.S. prosecutors, who found that the bank had allowed billions of dollars to be moved throughout its network in violation of sanctions laws and anti-money-laundering statutes.

In 2013, the judge took the unusual step of exercising “supervisory” control over the government’s agreement with HSBC, which allowed the London-based bank to avoid criminal charges.

The agreement required the bank to submit to the oversight of an independent monitor, Michael Cherkasky, who submitted a 1,000-page report to the Justice Department in 2015. Prosecutors sought to keep it under seal, saying it served as a “road map” for criminals seeking to exploit vulnerabilities in the system and that making it public made the monitor’s job more difficult.

Stuart Levey, the bank’s chief legal officer, hailed the decision to keep it sealed in a statement, saying “This decision allows HSBC’s agreement with the Justice Department to operate as intended.”

What’s in the Sealed Report? Bloomberg Exclusive

The sealed document, covering the first year of Cherkasky’s five-year monitorship, is the product of five dozen people who conducted interviews, scoured emails and documented meetings to chronicle the bank’s efforts to improve controls, according to people who described it to Bloomberg News in 2015. The report showed reform efforts meeting with resistance from leaders of HSBC’s U.S. investment banking unit, including foot-dragging, bullying and discrediting of in-house watchdogs.

HSBC spokesman Rob Sherman declined to comment on the contents of the report at the time, saying the firm had expanded its compliance staff and that prosecutors determined the bank was making progress.

Dennis Kelleher, president of Better Markets, called the appeals court ruling disappointing and said it put private interests above the public’s. Better Markets is a group formed after the 2008 financial crisis to lobby for financial reform.

“Today’s decision prevents the public once again from knowing what one of the biggest law-breaking financial institutions in the world is doing to comply with the law or even if it is complying with the law,” Kelleher said in an emailed statement. “The Department of Justice outsourced its job to a private monitor paid by the bank. No one will ever truly know if he is doing his job or whether the DOJ is doing theirs.”

Disclosure Sought

In November 2015, a borrower in a dispute with HSBC over a mortgage-loan modification, Hubert Dean Moore, Jr., asked that Gleeson make the report public, saying in a letter that the information could be useful in his case. Moore said he found it “difficult to understand” how the report could remain under seal if it had already been reported by the press.

Gleeson, a former federal prosecutor best known for winning the conviction of late mafia boss John Gotti, scrutinized the government’s arrangement with HSBC after concerns were raised in the press that prosecutors may have been too lenient. The judge resigned in March 2016 and is now a partner with Debevoise & Plimpton LLC in New York.

Prosecutors challenged the ruling, saying the judge didn’t have the authority to take supervisory control and the Justice Department is entitled to the presumption “that it is lawfully discharging its duties.”

The appeals panel said that Gleeson might have been justified in invoking his supervisory power if he became aware of misconduct in the implementation of the deferred-prosecution agreement, such as through a letter from a whistle-blower.

Roving Commission

“The point is not that the court can or should disregard governmental misconduct, but rather that a federal court has no roving commission to monitor prosecutors’ out-of-court activities just in case prosecutors might be engaging in misconduct,” the appeals court said.

One of the judges on the appeals panel, Rosemary Pooler, separately called for Congress to revisit agreements to defer or not prosecute. She said they are increasingly used to allow corporations to avoid criminal charges rather than their original purpose -- to allow individuals to avoid the consequences of a criminal conviction through programs such as education, job training and substance-abuse treatment.

While using deferred-prosecution agreements in this way “is neither improper nor undesirable,” Pooler said, Congress should review their use and establish written guidelines, as well as requiring the agreements to be submitted to district courts for review.

“An indictment alone can deal a death blow to a corporation, with severe collateral consequences for blameless employees and shareholders,” Pooler wrote. “As the law governing DPAs stands now, however, the prosecution exercises the core judicial functions of adjudicating guilt and imposing sentence with no meaningful oversight from the courts.”

The case is U.S. v. HSBC Bank USA NA, 12-cr-00763, U.S. District Court, Eastern District of New York (Brooklyn). The appeals court case is U.S. vv HSBC Bank USA NA, 16-308(L), U.S. Court of Appeals, Second Circuit (Manhattan.)

— With assistance by Greg Farrell

(Updates with HSBC comment in sixth paragraph.)
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