Whenever a scandal of sufficient magnitude arises at a bank, it’s standard practice to hire an “independent” third party to conduct an investigation and give a report to senior management and the board. For instance, former Comptroller of the Currency Gene Ludwig, now head of Promontory Group, became the go-to person for this sort of report for rogue traders. It’s a great business because you get face time with the top people at the organization and get to charge handsome fees too.
I must confess I’d never focused on the notion that banks would hire outside law firms as a way to put a shield around the questionable activity, to impede regulators from getting to the bottom of criminal or merely potentially costly (in terms of litigation risk) conduct.* In the US, even though it is being nibbled at around the margins, attorney-client privilege, particularly as relates to business matters, is one of the areas that is still pretty much exempt from disclosure.
An important piece in the New York Times by Ben Protess and Jessica Silver-Greenberg, based on a Freedom of Information Act filing, shows that the Treasury Inspector General believed that JP Morgan had used attorneys to “investigate” its conduct in dealing with Bernie Madoff with the intent of impeding regulatory scrutiny and allowing staff to get away with perjury (in this case, the typical “I remember nothing” defense).
The reason this is such a striking charge is that, it comes from two of the most bank friendly parties, the Office of the Comptroller of the Currency and the Treasury Inspector General, to which the OCC escalated its belief that JP Morgan was using counsel to hide misconduct. If you recall Neil Barofsky’s book Bailout, the Treasury Inspector General is considered to be one of the most spineless of all IGs. For something not to pass the smell test with the Treasury IG suggests it was pretty rancid. But they were not in a position to take it further, and the DoJ, which would be the agency that would have to go to the mat with JP Morgan. Cronyism? Reluctance to go mano a mano with a bank that would clearly throw lots of heavyweight law firm firepower at fighting back? Or simply bureaucratic “not invented here”?
Here’s the set-up for the story:
It remains one of Wall Street’s most puzzling mysteries: What exactly did JPMorgan Chase bankers know about Bernard L. Madoff’s Ponzi scheme?
A newly obtained government document explains why — five years after Mr. Madoff’s arrest spotlighted his ties to JPMorgan and later led the bank to reach a $2 billion settlement with federal authorities — the picture is still so clouded…
Federal regulators at the Office of the Comptroller of the Currency sought copies of the lawyers’ interview notes, the government document and other records show, hoping they would open a window into the bank’s actions. The issue gained urgency in 2012, according to the records, when the comptroller’s office conducted its own interviews with JPMorgan employees and discovered a “pattern of forgetfulness.”
Suspicious that the memory lapses were feigned, the regulators renewed their request for the interview notes held by JPMorgan’s lawyers.
But JPMorgan, which produced other materials and made witnesses available to the comptroller’s office, declined to share those notes. In its denial, the bank cited confidentiality requirements like the attorney-client privilege, a sacrosanct legal protection that essentially prevents an outsider from gaining access to private communications between a lawyer and a client.
Even after the comptroller’s office referred the issue to the Treasury Department’s inspector general, which sided with the regulator, the fight dragged on for months. Invoking a rare exception to attorney-client privilege, the inspector general argued that the lawyers’ interviews were essentially “made for the purpose of getting advice for the commission of a fraud or crime.”
The New York Times reporters’ key document is the letter from the Department of Justice, in September of last year, rejecting the Treasury IG’s request to revoke attorney-client privilege:
…the civil division ruled that “unfortunately, O.I.G. has provided no basis — and we have not independently uncovered any basis — for suggesting that” the interview notes were “made for the purpose of facilitating a crime or a fraud.”
There are other issues here. The article notes that disputes between banks and regulators rarely rise to the level where the DoJ is called in to act as a potential enforcer. Given how utterly intransigent JP Morgan has been in its dealings with the OCC (recall how in Senate hearings, they were revealed to have lied repeatedly about their failure during a critical two weeks of the London Whale fiasco, to turn over information they provided routinely, invoking patently false “computers are having trouble” excuses. This is a high-level overview of some of the findings from the Senate report on the London Whale episode:
Management hid the existence and role of the unit within the JP Morgan Chief Investment office that entered into the “whale” trades, the Synthetic Credit Portfolio, from its inception, even as its exposures ballooned, from the OCC
The bank made repeated, knowing misrepresentations about the size of the losses, the severity of the control failures, and the degree of management knowledge to regulators and investors
The contempt for regulators and for the need for timely and adequate disclosure is symptomatic of an out of control environment. Between the beginning of the year and end of April 2012, the SPG breached risk limits 330 times, sometimes even violating bank-wide limits. Yet staff and management regarded them as an inconvenience rather than treating them as shrieking alarms that warranted swift action
JP Morgan managers and risk control officers were aware of and complicit in the mismarking of positions (this is a very big deal in a financial institution).
It is not hard to imagine that the OCC went back and re-examined some recent and open matters with the Morgan bank and came to the conclusion that it had been far less forthcoming with the regulator than was required. And the Madoff affair, which was highly public but at the same time should have implicated only a fairly small number of staffers, would be the sort of cover-up that would be highly offensive after the London Whale losses.
The reporters also stress that the use of attorneys as an information shield for banks is already troublingly widespread:
And federal authorities worry that Wall Street might take the privilege too far — particularly in an era when banks facing a torrent of federal scrutiny are hiring dozens of law firms to conduct internal investigations alongside the government. As those investigations proceed, banks have invoked a number of protective firewalls, including attorney-client privilege and the work product doctrine, which shields interview notes and other documents that bank lawyers drafted in anticipation of litigation.
“Why hire a lawyer to do an internal investigation? It’s because you get the privileges,” said Bruce A. Green, a former federal prosecutor who is now a professor at Fordham Law School, where he directs the Louis Stein Center for Law and Ethics. “Otherwise, you’d save a little money and hire a consultant or accountant.”….
The Madoff case is not the only one on Wall Street to raise questions about attorney-client privilege. Bank of America and Citigroup have had their own run-ins with authorities over whether to waive the privilege in a limited way during litigation, though those matters were resolved without the Justice Department intervening. And in an investigation into JPMorgan’s potential manipulation of energy markets, the Federal Energy Regulatory Commission challenged the bank’s assertion that attorney-client privilege protected certain emails.
There’s more important, as in troubling material in this important piece. It raises the question as to whether class issues are at work, whether the Department of Justice is unwilling to push back against the assumption that law firms have not crossed the line in the use of attorney-client privilege (these firms are members of a particularly elite club, so the accusation would be perilously close to charging them with an ethical breach).
If nothing else, this pattern shows how banks continue to push back against laws and regulations in ways that even normally supine regulators find unacceptable. That alone should give plenty of cause for pause.
*Perhaps that’s because one of the best bits of forensic work during the crisis was when the Swiss National Bank (Switzerland’s central bank) required UBS to issue a detailed report to as to how they screwed up so badly as to need a bailout. Some UBS people wrote to me later indicating they had been interviewed by outside counsel. However, banking has a special status in Switzerland (saying bad things about banks can land you in jail; I have a colleague who is critical of Swiss banking practices who will not travel to Switzerland for that reason), so the nexus between attorney-client privilege and bank regulator authority may shake out differently there than in the US.