[ by Melanie Gretchen ]

The Justice Department vows to adopt a new model for prosecuting big banks, amid criticism that it let Wall Street off the hook after the financial crisis.  Going forward, the government intends to push for guilty pleas, rather than just fines and [internal bank] reforms, when prosecuting financial fraud cases.  Bracing for the new change, lawyers for several banks have begun adjusting their defenses and urging banks to fire employees suspected of wrongdoing.

Lanny Breuer, the departing head of the agency’s criminal division, created the strategy based on his foreign bribery actions and pharmaceutical cases.  To date, the DOJ has extracted guilty pleas only from subsidiaries of big foreign banks.  This serves 2 purposes: (i) to inflict reputational damage and (ii) to send a warning to the financial industry.  So far, the shift has been met with mixed results.

"Extracting a guilty plea from a wholly-owned subsidiary finally enables the Justice Department to look tough on financial institutions while sparing them from the corporate death penalty." -- Evan Barr, former federal prosecutor who now defends white-collar cases as a partner at Steptoe & Johnson.

What is coming up short, or not being accomplished ...  is significant action.  These guilty pleas have not as yet led to anything but fines and reforms.  UBS was fined $1.5 billion for its role in the Libor manipulation scandal, ordered to bolster its internal controls, and agreed to have its Japanese subsidiary plead guilty.  Similarly, the Royal Bank of Scotland ("RBS") settled with regulators over its Libor manipulation charges, by agreeing to a $612 million penalty, while its Japanese subsidiary also was the "fall guy: that pled guilty.  In both cases, e-mail traffic obtained from both Japanese units detailed how traders routinely manipulated rates to increase profits.  U.S. and U.K. authorities have not been so lucky.

[C-I Note: Will the upcoming prosecution of Citigroup and JPMorgan Chase reinforce or undermine Mr. Breuer's strategy, setting the stage for what to expect going forward?  Is the problem the regulation system that warns that extending the campaign to Citigroup would threaten the company's stock and prompt an exodus of clients, an approach which could apply to prosecution of other banks?  Is the problem the public which may or may not know it is profiting from the bank's transgressions?  Either way, it looks like we're in for a long process.]

For further details, go to [Dealbook, 2/18/13].