Perhaps heralding in a "New Era of Enforcement," the Justice Department secures a guilty plea and individual charges. 

[ by Howard Haykin ]

UBS Chairman Axel Weber traveled to Washington last Tuesday to plead his firm's case to the Justice Department.  The request for a lighter punishment was like so many made in the past.  Yet, the response was unfamiliar, as the government refused to budge.  The Justice Department, with support from Attorney General Eric Holder Jr., decided the bank's actions were simply too egregious, according to people briefed on the matter.  

Afforded no 'wiggle room', UBS AG came back the next day and became the first big global bank in more than 2 decades to have a subsidiary plead guilty to fraud.  UBS announced it would plead guilty to one count of felony wire fraud as part of a broader settlement.  And so, with federal prosecutors, British, Swiss and American regulators secured fines of $1.5 billion, more than triple the only other rate-rigging case - that being Barclays' $452 million.   But the Justice Department didn't stop there, and it filed criminal charges against 2 former UBS traders. 

The guilty plea and the individual charges provide the Justice Department with a long-awaited [C-I:  and probably long-sought after] case to prove it is taking a hard line against financial wrongdoing.

Accomplishing What It Failed to Do in HSBC's AML Case.    Just a week prior to settling its interest-rate manipulation case against UBS, the government settled its money-laundering case against HSBC.  The government permitted HSBC to avert indictment so long as it agreed to pay $1.9 billion - a record monetary fine that was viewed as nothing more than a "slap on the wrist."  That's because the government, once again, demonstrated that elite banks of the world - those that are the largest and most interconnected - are simply too big to indict. 

Prosecutors, however, managed to reverse course with the UBS by working out a measured, accommodating settlement. 

• The government secured a guilty plea from a major financial institution - its first since Drexel Burnham Lambert admitted to six counts of fraud in 1989 - a severe punishment for one of the world's most powerful banks.

• The government drew the guilty plea from a Japanese unit of the bank, thereby shielding UBS's parent company from losing its charter - a technicality, of sorts - that managed to avoid imperiling the broader financial system , among other major repercussions. 

What Changed in Six Months.    Earlier in 2012, authorities did not seem ready to take an aggressive stance with UBS.  They had just scored their first Libor settlement, a $452 million payout from Barclays  (credit the CFTC and U.K.'s FSA).  UBS, which had already struck a conditional immunity deal with the Justice Department's antitrust division, figured its penalty would be similar.   The immunity deal, some UBS executives contended, would protect the bank from criminal charges.  Even officials at the Justice Department reportedly were skeptical about the prospect of levying large penalties.  Then the tone shifted this fall.

• After examining thousands of e-mails and hours of taped phone calls, the agency's criminal division concluded that the conduct at the Japanese subsidiary warranted a criminal charge.

• Agency officials cited the bank's repeated run-ins with authorities - e.g., citing UBS's agreement in 2009 to pay $780 million to settle charges that it had helped clients avoid taxes.

• While Justice officials were split over how to proceed, Attorney General Holder cast the deciding vote in favor of securing a guilty plea from the subsidiary.

• UBS was caught off guard. 

• UBS sent several lawyers to Washington to negotiate the fine print of the deal. 

• UBS Chairman Weber then joined the lawyers - in the bank's last-ditch appeal to the criminal division. Mr. Weber and his general counsel explained to the agency how UBS had overhauled its management ranks, bolstered internal controls and generally tried to clean up its act.

• Lanny Breuer, head of the Justice Department's criminal division, and other Justice Department officials agreed to consider the bank's request to abandon the guilty plea.  Hours later, a prosecutor phoned to say the agency was standing firm.

• UBS agreed to the guilty plea, conceding that the Japanese unit would otherwise most likely face an indictment. In turn, prosecutors credited the bank for its recent efforts to improve.

Mr. Breuer, added this at the news conference:  "We are holding those who did wrong accountable.  We cannot, and we will not, tolerate misconduct on Wall Street."

The fallout from the UBS case is expected to ...  increase pressure on some of the world's largest financial institutions and spur settlement talks across the banking industry.  Expect the Royal Bank of Scotland and American institutions, including JPMorgan Chase, to follow suit. 

For further details, go to:   [ Dealbook, 12/19/12 ].