The role of government prosecutor is one of immense power, necessary to protect the people against crime but also easily subject to overreach and abuse. With our structure of multiple layers of government comes multiple layers of prosecutors, each usually ambitious for higher office, with overlapping jurisdictions, and competing for public attention. Needless to say, when there is a prosecution of a prominent figure or large corporation, particularly a financial institution, there is huge reason for skepticism.
The state of the art in the prosecutorial shake-down for political gain was set by Eliot Spitzer, Attorney General of New York from 1999 - 2006. The office of Attorney General in New York is one with very limited criminal jurisdiction. Mainly, the AG gives legal advice to state agencies and handles civil litigation for and against the state. Almost all criminal prosecution authority in New York rests in the county District Attorneys. But somewhere along the line the AG got the authority to enforce the Martin Act, a vaguely-worded concoction that seems to delete the mens rea requirement from financial crime. Spitzer took that and ran with it. He was shocked, shocked to discover that large New York banks offered investment banking and investment advice under the same roof. Next thing you know he had shaken down, among others, Citigroup for some $400 million, Merrill Lynch for $100 million, and so forth. And, of course, gullible journalists dubbed him the "sheriff of Wall Street," without bothering to take a critical look at the merits of the cases. Next thing you know, Spitzer was Governor, only to flame out immediately.
But the techniques that Spitzer used to get to the top did not go unnoticed. We now have two contenders for the title of the next Eliot Spitzer in New York.
First up is Benjamin Lawsky, Superintendent of the Department of Financial Services. That Department was created in 2011 by the merger of the former Banking and Insurance Departments. Lawsky got his position by nomination of current Governor Cuomo. A few days ago Cuomo and Lawsky put out a press release announcing a settlement with Bank of Tokyo Mitsubishi-UFJ, Ltd., a large Japanese bank, in the amount of $250 million. The press release got front page play in the Wall Street Journal, among other places. What did the bank do wrong? According to the press release:
Between 2002 and 2007, BTMU moved billions of dollars through New York for government and privately owned entities in Iran, Sudan, and Myanmar, and entities on the Specially Designated Nationals (SDN) list issued by the U.S. Treasury Department's Office of Foreign Assets Control (OFAC).
Not much more detail beyond that. It sounds at least somewhat plausible, but do you wonder, as I do, what this has to do with New York State banking regulation, as opposed to the foreign policy of the United States? Just a little looking quickly turns up a Bloomberg article linking to an Enforcement Information from the U.S. Government from December 12, 2012, punishing BTMU for the exact same conduct, except that the Federal sanction was only $8.6 million. The Enforcement Information says that the conduct occurred from 2002 to 2007, and that BTMU initiated voluntary disclosure to OFAC when they discovered it. Nothing about disclosure to the New York banking regulators -- why would they?
So what is the interest of the New York regulators here, other than hitting up a vulnerable bank for $250 million? Follow the link in the press release to the Consent Order with BTMU. The basis for the sanction under New York law is stated to be Banking Law Section 44. But wait, that section only provides the procedure by which penalties can be imposed for violations of the law; it does not actually give the provisions that may have been violated. What is the violation of New York law, people?
Are you surprised that a large international bank would pay the New York banking regulator $250 million, even though that bank just settled with the actual governing Federal regulator on the same conduct for a small fraction the amount, and the New York people can't even name the New York law that was violated? Well, remember that these people can put BTMU out of business in New York in about two minutes, and they'd really, really like their name on the front page of the Wall Street Journal.
And yet this year's Spitzer prize is not an automatic for Lawsky; there is competition! In a column yesterday, Charles Gasparino of the New York Post nominates current AG Eric Schneiderman, suggesting that he leads "possibly the most politicized law-enforcement outfit in the country." The evidence? Well, there's the fact that Schneiderman is continuing the case against Maurice Greenberg, commenced during Spitzer's term some eight years ago, with most charges long since thrown out. Greenberg has served a term as Chairman of the Manhattan Institute and is known for giving to Republicans. Meanwhile, we have MF Global, where over $1 billion disappeared, while the firm was headed for Democratic ex-Senator and Governor of New Jersey and big Democratic contributor Jon Corzine. No prosecution of Corzine from Schneiderman, or anyone else in New York. Looks like the contest is going to be a horse race this year!