[ by Melanie Gretchen ] Peter Henning, in Dealbook's "The Deal Professor" column, gives a sense as to what may happen next in various investigations - at the federal and New York state levels - into Standard Chartered's dealings with Iran.  The New York State Department of Financial Services referred to the bank "as a rogue institution" while announcing its intention to seeks revocation of the bank's license to do business in New York - because of the bank's dealings with Iranian customers.  Mr. Henning's piece, which is basically intact and unedited, is presented to C-I members, immediately following these words.  Members can access the referenced piece using a link provided at the bottom of this post.

'The order issued to Standard Chartered by Benjamin M. Lawsky, the superintendent of the New York State Department of Financial Services, creates a problem for the federal government in its own investigations of the bank. Mr. Lawsky accused the bank of operating "as a rogue institution" in its dealings with Iranian customers in violation of federal law, and seeks to revoke its license to do business in New York.

As DealBook has reported, Mr. Lawsky caught the Federal Reserve and the Justice Department off guard by accusing the bank of misconduct. Now the Fed and Justice have to decide what to do next: Sit back and watch the state proceeding play out, or pursue the case on their own, perhaps working toward a settlement to resolve the entire proceeding.

State regulators usually don't take the lead in cases involving multinational financial institutions, deferring to federal regulators and prosecutors. Whether Mr. Lawsky's charges will prod the federal government to get moving on its own cases against Standard Chartered remains to be seen, but he is acting within a broad grant of power under New York law to pursue his case.

Section 39 of the New York Banking Law gives the superintendent the power to require any financial institution operating in the state to provide an explanation at a hearing whenever it appears that "it has violated any law or regulation." The law also gives Mr. Lawsky broad authority to revoke a bank's license if a violation is found.

The statute does not limit the types of violations that can prompt a sanction to only state law. The detailed description of Standard Chartered's possible violations of federal law on reporting transactions involving Iran is listed as one basis for pursuing the case.

Usually a state banking regulator would have limited power to affect the operations of a foreign bank, but New York is in a unique position because of Wall Street. A global operation like Standard Chartered, which has branches in 70 different countries, arguably has to maintain a branch in New York because of the need to access the financial markets in this country to serve its clients worldwide.

That Wall Street comes within his purview gives Mr. Lawsky the opportunity to have an impact far beyond what other state regulators could have against a global bank with a modest presence in the United States. After all, Standard Chartered has only 940 employees in this country.

Yet revoking the bank's license could deliver a major blow by depriving the bank of access to the financial markets. So while Standard Chartered disputes Mr. Lawsky's accusations, there is intense pressure to reach some type of resolution.

Of course, this is not the first time a New York official has taken the lead on a financial issue before the federal government acted. Former Attorney General Eliot Spitzer took the mantle of "Wall Street's Top Cop" in pursuing cases involving Wall Street analyst conflicts of interest and American International Group. Going back even further, the office of former Manhattan District Attorney Robert M. Morgenthau took the lead in prosecuting defendants connected to the Bank of Credit and Commerce International, better known as B.C.C.I. The current Manhattan District Attorney, Cyrus R. Vance, Jr., has continued to pursue cases against global banks, including ING and Barclays.

The Federal Reserve and the Justice Department are now in the uncomfortable position of deciding what to do with their investigations. They usually prefer to resolve cases through a negotiated settlement. The recent resolution with Barclays over its manipulation of the Libor, or London interbank offered rate, is a template for the kind of settlement Standard Chartered might have expected: a multimillion dollar financial penalty and modest admission of wrongdoing, but no criminal conviction to affect its operation.

The state case could also jeopardize the federal investigations by causing Standard Charter to end its cooperation if it decides to fight, particularly if the Justice Department wants to pursue charges against individuals. Federal prosecutors depend on a company's continuing cooperation to furnish the evidence needed to determine whether any employees should be a focus, but once the bank gets dragged into a proceeding, the incentive to cooperate further will be significantly diminished.

The order sets an aggressive schedule by calling for a hearing on Aug. 15, only nine days after filing the order. There is a chance Standard Chartered that can get Mr. Lawsky or a state court judge to delay the proceedings to give it more time to put together a defense, which would also allow it to try to work out a resolution. But if it can't slow things down, then the question is how aggressively it should fight the New York regulator if it wants to avoid a hearing that is likely to reveal some embarrassing information.

And even if the different parties want to reach a settlement, figuring out exactly what Standard Chartered did wrong remains to be seen. Mr. Lawsky claims the violations involving Iranian transfers totaled $250 billion, while the bank claims that only $14 million was improperly reported -- needless to say, that is a significant gap that would have to be bridged in any resolution of the case.

Mr. Lawsky's order has certainly upset the apple cart - and probably a few summer vacations - by pushing the case forward, probably well in advance of when the Federal Reserve and Justice Department wanted to move. Now that he has acted, the question is probably when, not if, the federal government will take action against Standard Chartered.'

[Dealbook, 8/8/12]