Swiss Banks and the U.S. Department of Justice

1. Swiss Banks and the U.S. Department of Justice

In the mid-2000s, the DOJ began investigating UBS, the largest Swiss bank, on the grounds that UBS violated U.S. criminal law by aiding American clients in setting up offshore bank accounts to avoid U.S. tax laws.¹⁷³ As a result of the investigation, the DOJ and UBS entered into a deferred-prosecution agreement in 2009, under which UBS agreed to turn over information on certain American clients in exchange for the DOJ’s promise not to prosecute.¹⁷⁴ Following the UBS agreement, the DOJ announced a program offering other Swiss banks amnesty through similar deferred- or non-prosecution agreements.¹⁷⁵ Although some banks have ended up in court—including the oldest private Swiss bank, Wegelin, which declared bankruptcy after pleading guilty to assisting in U.S. tax evasion¹⁷⁶—hundreds of banks have signed on.¹⁷⁷ Switzerland, for its part, recently reversed centuries of tradition by relaxing laws that previously prevented Swiss banks from revealing certain bank customer information.¹⁷⁸ Although the final word on the DOJ’s efforts has not yet been written, its innovative and expansive use of deferred-prosecution agreements has sent waves through the banking industry.2. Spitzer, Merrill Lynch, SEC, and the Global Analyst Research Settlement

Following the tech stock market bubble of the late 1990s and the ensuing crash in 2000, then-New York Attorney General Eliot Spitzer launched an investigation into the major investment banks. Spitzer was investigating the claim that investment bank analysts were incentivized to issue bullish ratings for companies that were clients of other parts of the banks.¹⁷⁹ Investors who bought stocks relying on the positive ratings pointed to this conflict of interest when the stocks subsequently suffered significant losses during the crash. Spitzer’s investigation initially focused on Merrill Lynch. Relying on a little-known New York law, the threat of indictment, and publicity, Spitzer reached a settlement with Merrill Lynch under which the bank paid a $100 million fine and restructured how analysts were paid.¹⁸⁰ Spitzer’s investigations attracted significant attention because of the aggressive use of the state’s Attorney General office and because this was an area usually regulated by the federal Securities and Exchange Commission rather than the states.¹⁸¹ Although Spitzer threatened to go after other Wall Street firms as well, the SEC ultimately entered with its own investigation into the practices. The result was a Global Research Analyst Settlement entered into by the SEC and ten Wall Street firms that was similar to the settlement Spitzer reached with Merrill Lynch.¹⁸² 3. Cybersecurity Regulation

Although cybersecurity is discussed in another case in the course, cybersecurity regulation also presents an area where public-private regulatory regimes might emerge in the future. Recent attacks on prominent targets such as JP Morgan, Target, and Home Depot have increased public and corporate awareness of the importance of cyber security.¹⁸³ Currently, no comprehensive regulatory framework exists.¹⁸⁴ Instead, companies are faced with a rapidly changing patchwork of state and federal legislation, case law, regulatory action, and voluntary standards.¹⁸⁵ This uncertain regulatory arena, combined with companies’ interests in protecting customers’ and their own data, creates a field that is potentially ripe for public-private regulatory regimes.

Please read through the readings and one of the three background reading sections below of your choice (Japan Tobacco International, Swiss Banks, or Spitzer/Merill Lynch) and respond to one of the discussion questions that follow. Send your response to this question to Professor Kaden (lewis.kaden@gmail.com) the day before Class 1 by 9:00 pm.

1. How would you characterize these kinds of agreements legally? Does it really matter how we characterize them?

2. What makes the agreements “regulatory” as opposed to legal settlements or contracts? The agreements do not appear to be regulatory in the traditional sense of rules promulgated by legislatures or agencies. In identifying the agreements as “regulatory,” does it matter whether the agreements are forward-looking versus backward-looking? Are broad versus narrow in scope? Involve one private actor versus several? Have the potential to affect entities other than the parties to the agreement?

3. Does it matter who the public parties to the agreement are? Note the various public entities involved in the agreements in the readings: a supranational entity (the European Commission), sovereign states (the European nations), regulators (the SEC), federal prosecutors (the DOJ), and state prosecutors (the NY Attorney General). Does the nature of the public party affect whether the agreement is considered a regulatory regime? As will be explored further below, what are the concerns with prosecutors being involved in a regulatory role?

4. What is the difference between a regulatory “regime” versus an isolated agreement? Is it similar to whether we consider an agreement to be “regulatory”?

5. What is the difference between an international public-private regulatory regime and a multi-lateral treaty? Read Clause 25 of the JTI Agreement. Does the fact that other EU countries can unilaterally sign onto the agreement make it analogous to a multi-lateral treaty?

1. In answering the following questions, consider what motivated the parties to enter into the various agreements. In other words, how do the agreements satisfy the various parties’ interests and what are the advantages of a cooperative agreement versus court or a legal settlement?

2. When JTI and the other tobacco companies entered into their respective cooperation agreements, they were ostensibly “winning” in the conflict with the EU, at least on the legal front. Why, then, would JTI (and the other tobacco companies) have entered into such an agreement? Consider whether the obligations created by the agreement put JTI at a competitive disadvantage in the European market and what impact the agreement would have on JTI's EU competitors? What pressures might JTI have faced and from whom?

3. What characteristics of the Additional Payment Clauses (Sections 7.10 and 7.11) make it desirable for both JTI and the European governments? Why would JTI have agreed to no-fault payments for certain seizures?

4. Under Section 13 of the JTI agreement, JTI can deduct from its payments any monetary liability resulting from conduct that occurred before the agreement was executed. The benefit to JTI is obvious: their payments under the agreement remain constant. How do the European countries benefit?

D. Enforcement of public-private regulatory regimes and agreements

1. How are the various agreements enforced, and what are the consequences of failure? Note the unusual enforcement mechanisms in the JTI agreement to ensure JTI’s compliance with the agreement (Section 11) and to resolve any disputes over the agreement (Section 14). Do you think this system is sufficient to ensure compliance and resolve any disputes? Why would the European governments not insist on being able to audit JTI to ensure compliance? Would this system work without a supranational entity like the European Commission?

1. What are some of the problems that might arise if agreements such as the JTI agreement were to become a more common method for dealing with multinational or multijurisdictional disputes?

2. JTI was initially sued in U.S. courts. Why did the European Commission and European states bring suit in the U.S. rather than a European court? What interests did U.S. courts have in the dispute? What other mechanisms may have been pursued for resolving the dispute? Why do you think they were not pursued?

F. Parties’ interests and motivations

1. What motivation did Swiss banks have to sign deferred-prosecution agreements with the DOJ? Why would a small Swiss bank like Valiant, which had fewer than 500 American client and appears not to have done anything illegal, enter into an agreement?

2. Given the bi-partisan Congressional pressure on the DOJ to go after Swiss banks (see Politico article, Panel: DOJ Lax on Swiss Bank Fraud), why would the DOJ utilize deferred-prosecution agreements rather than simply go to court? If the DOJ believes it has a case against UBS, why wouldn't the DOJ just prosecute UBS?

3. All of the agreements in the readings were multi-lateral rather than bi-lateral. What are the advantages and disadvantages of one over the other? For JTI, what was the advantage of negotiating a multi-party agreement rather than an agreement with each European state? For the DOJ, what are the benefits of creating a global amnesty program rather than prosecuting individual Swiss banks?

4. What are the advantages and disadvantages of waiting on the sidelines while a competitor enters into these kinds of agreements? Is JTI better off having been one of the first companies to sign a cooperation agreement? What about the Swiss banks? Swiss banks have faced very different outcomes depending on when and how they came forward. For example, Credit Suisse has received a much heavier penalty than UBS, who came forward earlier, and Wegelin went out of business after entering a guilty plea. Does this suggest there are strategic decisions in how companies enter into such agreements? Likewise, was Merrill Lynch better off or worse off for having settled with the NY Attorney General before the SEC announced its global settlement?

G. Risks involved in negotiations and agreements

1. What are the risks of entering into these types of agreements? Consider, for example, that governments cannot generally provide a release of future criminal claims. Since none was provided in the JTI agreement, how could JTI be assured it would not be charged with criminal conduct the day after signing the agreement? Likewise, how can Swiss banks prevent the DOJ from changing the terms of their agreement, as they claim it is doing in the readings?

2. Another risk companies face is that entering into negotiation in the first place may reveal sensitive information. For example, Swiss banks entering into deferred prosecution agreements with the DOJ may have to disclose information the DOJ might not otherwise be able to obtain, thereby opening the Swiss banks to subsequent prosecution. How can Swiss banks minimize this type of risk?

3. One important issue is how the parties publicize the agreement. If one party disparages the other parties, criticizes the agreement, or accuses the other party of violating the agreement, the agreement may quickly collapse or generate bad will. There are also political considerations. For example, some believed Eliot Spitzer aggressively used the media in reaching the settlement with Merrill Lynch. How can parties minimize this kind of risk?

1. How does the Global Analyst Research Settlement ensure compliance, i.e., that recommendations of research analysts at financial firms are independent of the firms’ financial interests? How is this different from the JTI agreement?

2. How do the DOJ-Swiss bank deferred prosecution agreements ensure compliance? To the extent the program mainly depends on voluntary disclosure by the banks, how can the DOJ ensure the banks are actually disclosing all the necessary information and will continue to do so in the future?

I. Multijurisdictional issues

1. The Swiss bank reading material demonstrates that different jurisdictions sometimes have conflicting laws, such as the Swiss banking privacy laws that prevented disclosure of information required by U.S. law. Should these types of tensions in international law be resolved through public-private regulatory regimes, or are they better left for the treaty process? What are the downsides to relying on treaties to resolve such tensions?

1. The Swiss bank and Merrill Lynch material both involve settlements signed by prosecutors rather than agencies or countries. (The SEC could also be considered as acting in a prosecutorial role.) We normally don’t think of prosecutors as regulators. Should we?

2. What are some of the problems associated with prosecutors wearing a regulatory hat? At the time, some accused New York’s Attorney General, Eliot Spitzer, of being overzealous in acting as a regulator, overstepping the bounds of both his office and what the law actually prohibited, and being politically motivated. Do these concerns have merit? Agencies like the SEC already wear both enforcement and regulatory hats, so what is the difference between an agency like the SEC and a state attorney general? Are there any special considerations when threats of prosecution involve financial companies?

K. Public-private regulatory regimes today

1. The agreements with JTI and other tobacco companies have generally been considered successful. The EU is currently negotiating with PMI over whether to extend their agreement, which is set to expire in 2016, and it appears the agreement will be renewed. But could similar agreements be entered into today, especially after the financial crisis? Would they be perceived as being too lenient to the companies?

1. 
   NOW: Tobacco Traffic, Transcript, Apr. 19, 2002, pp. 1–8.
   
2. 
   Marc Schapiro, Big Tobacco, The Nation, Apr. 18, 2002.
   
3. 
   Suzanne Daley, Europeans Suing Big Tobacco in U.S., N.Y. Times, Nov. 7, 2000.
   
4. 
   Bio: Kevin A. Malone, Krupnick, Campbell, Malone, Buser, Slama, Hancock & Liberman.
   
5. 
   Charles Lunan, Crash Lawsuits Expected to Keep Date Courts Busy, The Sun-Sentinel, Dec. 22, 1995.
   
6. 
   Myron Levin, Philip Morris Asks to Settle Suits, L.A. Times, July 21, 2001.
   
7. 
   Complaint, European Community v. RJR Nabisco, Inc., pp. 1–26.
   
8. 
   Opinion, European Community v. Japan Tobacco, Inc., Feb. 19, 2002.
   
9. 
   Opinion, Pasquantino v. United States, 544 U.S. 349 (2005).
   
10. 
    Mark Tran, Philip Morris reaches $1.25 Billion EU Agreement, The Guardian, July 9, 2004.
    
11. 
    European Union, Press Release: European Commission and JTI Sign 15-Year Agreement to Combat Contraband and Counterfeit Cigarettes, Dec. 14, 2007.
    
12. 
    JTI and European Community Cooperation Agreement.
    
13. 
    JTI and European Community Mutual Cessation Agreement.
    
14. 
    Algirdas Šemeta, Speaking Points, Committee on Budgetary Control, European Parliament, European Commission, Oct. 7, 2014.
    
15. 
    Peter Evans, Tobacco Firms Step up Fight Against Cigarette Smuggling, Wall Street Journal, Mar. 25, 2014.
    

16. 
    Department of Justice-UBS Deferred Prosecution Agreement and press release.
    
17. 
    Department of Justice, Joint Statement between U.S. DOJ and Swiss Federal Department of Finance and Program for Non-Prosecution Agreements or Non-Target Letters for Swiss Banks, Aug. 29, 2013.
    
18. 
    David Voreacos, Swiss Banks Seek Tax Amnesty as Third Accept U.S. Offer, Bloomberg, Jan. 26, 2014.
    
19. 
    Vanessa Houlder, Switzerland Pledges to Lift Veil on Tax Secrecy, Financial Times, May 6, 2014.
    
20. 
    Rachael Bade, Panel: DOJ Lax on Swiss Bank Fraud, POLITICO, Feb. 25, 2014.
    
21. 
    Daniel Wilson, Germany, France Want EU Pushback on US Bank Penalties, Law360, Aug. 4, 2014.
    
22. 
    David Voreacos, Giles Broom & Jeffrey Vogeli, Swiss Banks Ask U.S. to Amend Proposed Tax Amnesty Deals, Bloomberg, Oct. 23, 2014.
    

23. 
    Charles Gasparino, Merrill Will Pay $100 Million Fine to Settle New York’s Analyst Probe, Wall Street Journal, May 22, 2002.
    
24. 
    Securities Exchange Commission, SEC Fact Sheet on Global Analyst Research Settlements, Apr. 28, 2003.
    
25. 
    Nicholas Thompson, The Sword of Spitzer, Legal Affairs, May/June 2004.