UBS Group, in its bid to escape US criminal charges of manipulating currency markets, turned to “the godfather of leniency.”
As a Justice Department prosecutor in the early 1990s, Gary Spratling spearheaded a program that encouraged wrongdoers to admit to collusion to escape prosecution. Now UBS’s lawyer, Spratling played the leniency card in an effort to keep the Swiss bank from having to take a guilty plea. The plan came up short.
The bank escaped criminal charges this week over currency-rigging. Yet its main unit was forced to plead guilty to manipulating interest rates – charges the Justice Department had first leveled against the bank more than two years ago.
The split decision reflected in part competing interests within the Justice Department – between its antitrust unit, which can grant immunity to build big cases, and its criminal division, which wasn’t willing to let UBS off the hook in the interest-rate probe. The prosecutors there refused to budge despite appeals by UBS lawyers to progressively more senior officials.
“We want to send the message that this is not a cost of doing business,” Assistant Attorney General Leslie Caldwell said in an interview.
Caldwell, who heads the criminal division, said that the decision to charge UBS under the previous settlement was “pretty easy,” given that UBS had three previous criminal matters in recent years. She was referring to cases involving interest-rate manipulation, bid-rigging of municipal investment contracts, and aiding tax evasion by wealthy Americans.
Joseph Warin, one of the UBS lawyers involved in the talks, said he was surprised to hear Caldwell’s comments, which contradicted what they were “told during the negotiations, which was that the policy considerations were difficult to balance and the decision was challenging for the division to make.”
UBS was among six of the world’s biggest banks that agreed Wednesday to pay more than $5 billion to US authorities in prosecutors’ toughest stand yet in their multiyear pursuit of collusion in financial markets.
The Zurich-based company’s path to a guilty plea, based on accounts from several people familiar with the negotiations, can be traced back some 20 years. That’s when Spratling was tapped to revive a moribund amnesty program, which was supposed to encourage companies to confess cartel behavior.
Spratling, 72, who started at the Justice Department in San Francisco in the early 1970s, rewrote the program’s guidelines to ensure that the first companies to approach authorities to confess to antitrust behavior — and rat out other participants — would be guaranteed immunity from antitrust prosecution and escape fines. Those who didn’t step forward would be hit with stiff penalties.
“It’s sort of the white-collar version of what happens in prisons all over America – where people who are locked up compete in snitching on one another to reduce their sentence,” said Patrick O’Donnell, a defense lawyer at Harris, Wiltshire & Grannis in Washington.
It worked. The program has since led to prosecutions involving vitamins, auto parts, art auctions and municipal-bond investments, and is now being used to prosecute the world’s biggest banks.
In 2000, after nearly three decades at the Justice Department, Spratling joined Gibson, Dunn & Crutcher. The lawyer – who gained the “godfather” moniker from colleagues in the legal bar – took his antitrust chops to defend companies and guide them through the leniency process.
Among them was UBS, which approached the government with information that its traders were conspiring to rig the London interbank offered rate, known as Libor, used as a benchmark for interest rates.
UBS was rewarded for talking, at least in part. Along with Barclays, UBS won leniency from antitrust charges and settled in December 2012. Its Japanese subsidiary was forced to plead guilty to one count of wire fraud.
The settlement subjected the bank to a so-called non- prosecution deal with the Justice Department. Similar to probation, the agreement withheld charges as long as UBS abstained from criminal activity.
That was soon tested. In 2013, UBS executives learned about traders colluding to fix currency rates after reading an article, according to the Justice Department.
That September, Spratling again deployed his immunity defense, seeking leniency from antitrust prosecutors in exchange for telling all.
There was a risk: UBS lawyers knew that a repeat offense could cause the government to void the Libor settlement and charge the bank for the past conduct. That would have been unprecedented, and UBS’s lawyers doubted it would actually happen, one of the people said.
In March, Caldwell, the criminal division chief, delivered a warning shot: She said the department wouldn’t hesitate to punish repeat offenders by tearing up these deals and charging companies for past misconduct.
In April, Gibson Dunn lawyers gave a presentation to a team of prosecutors from the criminal division, headed by Benjamin Singer, the deputy chief of fraud.
The thrust of their argument: First, UBS’s cooperation had helped bolster the antitrust division’s case against the other banks. Senior UBS executives also weren’t aware of the currency-trading misconduct when the bank agreed to the Libor settlement in 2012. Finally, the bank was under new management, which was fully committed to compliance.
Singer wasn’t swayed. He recommended that the bank be held accountable for its violation of the non-prosecution agreement.
UBS’s team, led by Spratling, Warin, D. Jarrett Arp and David Burns, took its case up the line. They appealed to Singer’s boss, Andrew Weissmann, chief of the fraud section. An initial meeting focused on how much UBS had improved its compliance program.
At that meeting, the Gibson Dunn lawyers walked Weissmann’s team through the reforms the bank had undertaken to improve UBS’s internal compliance programs. The presentation was going well, until a member of the government team asked why UBS’s compliance people hadn’t discovered the problems in foreign-exchange trading sooner, said a person familiar with the matter.
That market wasn’t regulated, a member of the UBS team explained, so the compliance people didn’t spend much time focusing on that part of the business.
To the prosecutors, the response fell flat.
A few days later, UBS lawyers met with Weissmann’s team again to make their case. Weissmann remained skeptical, siding with Singer in favor of tearing up the agreement. While the bank’s lawyers touted their voluntary disclosure of wrongdoing, the prosecutors believed the bank had a legal obligation under the non-prosecution agreement to disclose the conduct and didn’t deserve to be rewarded for doing so.
The UBS team appealed once again, this time on May 4 to Caldwell. She listened to their pitch intently and asked occasional questions. On May 8, UBS got its answer: Weissmann told the Gibson Dunn team that Caldwell had decided against the bank.
The UBS lawyers made a last-ditch appeal, this time to Deputy Attorney General Sally Quillian Yates, the department’s No. 2 official. She declined to meet with them.
The bank had lost.
“UBS has taken responsibility for our past conduct, but any suggestion that UBS is worse than our peers is clearly not supported by the facts,” said Karina Byrne, a UBS spokeswoman. “Despite our full cooperation and our repeated attempts to address industry issues early and proactively, we have been held to this new standard.”
UBS lawyers remain convinced their decision to seek leniency was correct. Without it, UBS would have been charged twice, for an antitrust violation in the currency case and for fraud over Libor. It probably would have paid a much higher penalty, one of the people said.
Spratling and his team are moving on, guiding UBS through the next investigation that may snag other banks: precious-metals trading. UBS is cooperating with prosecutors in that investigation, and the Gibson Dunn team has won assurances that the bank won’t be charged by the criminal division, according to court documents made public as part of the currency settlement.
That’s the legacy of the leniency program Spratling designed: generating new areas of inquiry as companies bring misconduct to prosecutors in hopes of reduced penalties, according to Douglas Tween, a lawyer at Baker & McKenzie in New York.
“You’re giving companies an extraordinary incentive if they’re caught up in a case and they’re too late to get amnesty, to go out and find a new conspiracy,” Tween said.