Credit Suisse Guilty Plea Looms as U.S. Reassures Banks

May 19, 2014 12:45 pm ET

(Updates with information on Dougan, Rohner in third paragraph, closing share price in sixth.)

May 19 (Bloomberg) -- With Credit Suisse Group AG poised to become the first bank in more than a decade to admit to a crime in the U.S., regulators have been reaching out to some of the firm’s biggest business partners to avert a panic, according to a person briefed on those communications.

The bank reached a deal to plead guilty as early as today to resolve claims it helped Americans evade taxes and will pay about $2.5 billion to the Justice Department and regulators, said a person familiar with the matter, requesting anonymity because the details aren’t public.

Chief Executive Officer Brady Dougan and Chairman Urs Rohner will remain in their roles following the settlement, said a person with knowledge of the matter who asked not to be identified. Swiss newspaper SonntagsZeitung reported May 17 they might step down, without saying how it got the information.

Switzerland’s second-biggest bank will be allowed to continue operating in the U.S., two people familiar with the matter said. In their outreach ahead of the expected guilty plea, regulators reassured some of the largest U.S. financial firms that the current situation wouldn’t become a repeat of the crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc., the person briefed on the conversations said.

“It becomes a very weighty decision for us to cut someone off, and we wouldn’t do it lightly,” Goldman Sachs Group Inc. CEO Lloyd C. Blankfein, 59, said in a May 16 interview after his New York-based firm’s annual meeting in Irving, Texas.

Customer Flight

Credit Suisse fell 0.5 percent at 26.07 francs in Swiss trading. The stock is down 6.6 percent so far this month, compared with a 2.2 percent decline in the 43-company Bloomberg Europe Banks and Financial Services Index.

The biggest challenge facing Credit Suisse could be that some of its own clients, such as pension funds, have internal requirements that prohibit them from doing business with an entity that has pleaded guilty to a crime, one person said. Customer flight could hurt the bank’s credit ratings, boosting the firm’s borrowing costs. Representatives of two of the largest U.S. banks said the firms intend to continue their trading and banking relationships with Credit Suisse.

Dougan, 54, the first American to serve as sole CEO of Credit Suisse, is one of the few leaders of a global bank to have endured the financial crisis and the scandals that followed. A 24-year veteran of the firm, Dougan became CEO in May 2007 after heading the company’s investment bank. Rohner, 54, a former general counsel at Credit Suisse, became non- executive chairman three years ago.

‘Safe’ Hands

SonntagsZeitung reported two days ago that Rohner’s resignation letter was being drafted, while Tages-Anzeiger, another Swiss newspaper, reported over the weekend that “signs are mounting” that Dougan will be replaced.

“If he does leave the bank, that would not be good news because people see him as a pretty safe pair of hands,” Christopher Wheeler, an analyst at Mediobanca SpA in London with an outperform rating on Credit Suisse, said of Dougan.

The bank would pay almost $1.8 billion to the Justice Department, more than $600 million to the New York Department of Financial Services, led by Superintendent Benjamin Lawsky, and $100 million to the Federal Reserve, the people said.

Calvin Mitchell, a Credit Suisse spokesman, the Justice Department’s Brian Fallon and Barbara Hagenbaugh at the Fed all declined to comment. Matthew Anderson, a spokesman for Lawsky, didn’t respond to a phone message seeking comment.

Under terms of the agreement, Credit Suisse’s parent company would plead guilty to a conspiracy charge in federal court in Alexandria, Virginia, the people said. Seven of the bank’s executives were indicted in 2011 in that court.

False Statements

A guilty plea by a bank’s parent company would be the first since Credit Lyonnais SA, which admitted in January 2004 it made false statements to the Fed.

Credit Suisse will admit to a statement of facts that shows the U.S. tax evasion was widely fostered by the bank, the people said. The firm won’t have to disclose the names of U.S. account holders under terms of the agreement, one person said.

The Swiss government won’t resort to emergency laws to help Credit Suisse, Schweiz am Sonntag reported yesterday, citing comments by Swiss Finance Minister Eveline Widmer-Schlumpf to politicians at closed-door talks on May 16.

Switzerland’s former Justice Minister Christoph Blocher told the paper that Dougan and Rohner need to resign.

“It is shameful that the top brass are ducking for cover instead of fending off damage to the company,” Blocher was cited as saying.

UBS Agreement

The U.S. has had its sights on Swiss banks since it intensified its probe of the largest, UBS AG, in 2008. Zurich- based UBS entered into a deferred-prosecution agreement in February 2009 and paid a $780 million fine, admitting it fostered tax evasion. The bank gave the U.S. Internal Revenue Service data on more than 250 accounts and later turned over information on 4,450 accounts. In October 2010, the U.S. dropped its criminal case.

UBS changed top management after the accord with the U.S., even as the bank said that executives didn’t know about efforts to defraud the IRS. Marcel Rohner stepped down as CEO a week after the settlement and was replaced by Oswald Gruebel, himself a former Credit Suisse CEO. The following week, UBS nominated Kaspar Villiger, 73, for election to the board to replace Peter Kurer, 64, as chairman.

Tougher Stance

U.S. Attorney General Eric Holder is seeking to blunt criticism from lawmakers that the Justice Department considered large banks immune from prosecution after the 2008 financial crisis because of their size and importance to the economy. Holder has been faulted for settlements that let banks escape criminal charges while paying fines, admitting wrongdoing and improving controls.

Last month, Credit Suisse set aside 425 million francs ($476 million) to settle the Justice Department probe, in addition to 295 million francs for U.S. tax matters in 2011. It agreed in February to pay $196.5 million to settle a related investigation by the U.S. Securities and Exchange Commission.

Testifying to the U.S. Senate Permanent Subcommittee on Investigations in February, Dougan apologized for employee misconduct while deflecting blame for the offenses to a few bankers who “skirted the bank’s controls.”

Dougan, an Illinois railway dispatcher’s son known for his mild manner and intense work hours, started his career at Banker’s Trust Corp. He moved to Credit Suisse in 1990 as part of a team led by Allen Wheat, where they set up a derivatives unit called Credit Suisse Financial Products.

When asked about his extravagances by Bloomberg News in 2007, after succeeding Gruebel as CEO, Dougan listed his focus on work and a fondness for exercise. He was described in news stories at the time as a quiet man who jogs, prefers diet sodas and cut costs by discouraging color copying.

--With assistance from Tom Schoenberg and Joshua Gallu in Washington, Greg Farrell and Michael J. Moore in New York and Catherine Bosley, Zoe Schneeweiss, Jeffrey Vögeli and Elena Logutenkova in Zurich.