Bank Indictment Threats ‘Borderline Extortion,’ Herro Says

May 01, 2014 4:00 pm ET

(Updates with shares in ninth paragraph.)

May 1 (Bloomberg) -- The threat of prosecution against Credit Suisse Group AG and BNP Paribas SA may be part of a strategy by the Justice Department to produce as large a financial settlement as possible, according to one of the biggest shareholders in both firms.

“The government has a huge advantage here and can throw all this fear into the market and try to get us shareholders and employees to pressure management to settle,” David Herro, chief investment officer at Chicago-based Harris Associates LP, said today in a telephone interview. “It’s borderline extortion by our government.”

Zurich-based Credit Suisse has been the target since 2011 of a U.S. criminal probe into whether it helped Americans evade taxes. Paris-based BNP Paribas is the subject of a federal probe into possible violations of sanctions barring business with prohibited countries.

Keen to inflict tougher punishment on misbehaving global banks, prosecutors including Manhattan U.S. Attorney Preet Bharara are considering indictments against the two companies, a person familiar with the matter said April 29. Previous probes have been resolved through so-called non-prosecution and deferred-prosecution agreements, which have been criticized by U.S. senators for failing to hold banks accountable for breaking the law.

Jerika Richardson, a spokeswoman for Bharara, declined to comment on Herro’s comments, as did Cesaltine Gregorio at BNP Paribas and Calvin Mitchell at Credit Suisse.

Combined Stakes

Harris Associates, a unit of Natixis, was the third-largest owner of Credit Suisse with a 5.1 percent stake at the end of Dec. 31, data compiled by Bloomberg show. Harris owned 0.9 percent of BNP Paribas, making it the 10th largest holder.

Herro’s Oakmark International Fund owned $1.59 billion in Credit Suisse as of March 31 and about $750 million in BNP Paribas, according to the fund’s website. The combined stakes account for 7.5 percent of the fund.

Herro said he trimmed his BNP Paribas stake in the first quarter after shares rose 35 percent in the second half of 2013. He said he hasn’t changed his positions on recent news of potential charges.

BNP Paribas has declined 2.3 percent over the past two days as of 3:26 p.m. in New York trading, while Credit Suisse has risen 0.3 percent. Most Western European markets were closed today for the May Day holiday.

Working Together

The Justice Department’s tax division and prosecutors in Alexandria, Virginia, are leading the tax probe of Credit Suisse. Bharara, Manhattan District Attorney Cyrus Vance Jr. and David O’Neil, the head of the Justice Department’s criminal division in Washington, are working together in the BNP Paribas investigation, said the person, who asked not to be identified because the matter isn’t public. Benjamin Lawsky, superintendent of New York’s Department of Financial Services, has begun examining whether Zurich-based Credit Suisse helped clients evade New York taxes and is also investigating BNP Paribas.

Herro called the probability of criminal charges threatening the banking license of either institution “extremely low.”

“They’re going to have to pay, who knows, $1 billion or $2 billion,” he said, refering to Credit Suisse. “It doesn’t have any material impact on the long term viability or earning power of the company. It has some impact, but we have to be careful not to blow this out of perspective.”

Oakmark Returns

The $31.9 billion Oakmark International Fund has returned an annual average of 20 percent in the past five years, beating 92 percent of similarly managed funds. The fund has nearly quadrupled in size in the past three years. Harris oversaw $125 billion as of March 31, according to its website.

Herro warned that prosecutors risked creating “collateral damage” if they punished the companies too severely.

“These companies serve a purpose to society,” he said. “They employ people, they have shareholders, people have their pensions in these businesses.”

Politicians should take all this into account before leveling charges, “even if it means getting a little more revenue into the coffers, because that’s what it’s starting to look like.”

He said it would be better for prosecutors to pursue charges against individuals at the banks who broke the law and “throw them in jail.”

Bharara in a March 31 speech said it was critical for prosecutors to pursue both individuals and institutions.

“To effectively deter criminal conduct and to do justice, we need to do both,” he said. “Individuals must be held accountable for criminal conduct, but sometimes blameworthy institutions need to be held accountable, too.”

--With assistance from Tiffany Kary and Greg Farrell in New York, David Voreacos in federal court in Newark, New Jersey, and Patricia Hurtado in Federal Court in Manhattan.