The Ridiculous Reason Why UK Cops Just Dropped A Broker Fraud Probe

A few months back, when US Attorney General Loretta Lynch was out to prove how serious the post-Holder DoJ is about prosecuting white collar crime, we went out of our way to explain exactly why it was that Wall Street banks were allowed to effectively demand immunity from punishment in exchange for guilty pleas in FX rigging cases. 

Essentially, the banks were able to obtain SEC waivers which ensured that their ability to "efficiently" raise capital and participate in private offerings (among other important activities) would not be curtailed if they pleaded guilty. More specifically, the excuse for allowing Wall Street to skirt the very penalties that were put in place as a result of the very things for which the banks were being prosecuted was two-fold: 1) there’s the so-called 'Arthur Andersen effect'whereby the decade-old collapse of an accounting firm and the layoffs that accompanied it are somehow supposed to represent what would happen if a Wall Street bank were not able to claim seasoned issuer status, and 2) curtailing a major bank’s ability to issue capital "speedily and efficiently", participate in private placements, and manage mutual funds represents a systemic risk.

So in essence, the banks took a look at what the ramifications of pleading guilty might be and decided that it wasn’t in their best interests to go along with a deal that would come with the prescribed penalties. Not wanting to waste a chance at scoring public perception points by extracting completely hollow guilty pleas from the Wall Street banks which Main Street has come to profoundly distrust since 2008, the DoJ actually delayed the settlements in order to give the banks time to negotiate the waivers. As we noted in May: 

...none of the banks will enter guilty pleas without a guarantee from the government that no actual penalties (because monetary fines don’t count when you’ve got access to cheap Fed cash) will apply. You can expect The Justice Department to cave to these demands in relatively short order because while we know that TBTF guilty pleas represent but a pyrrhic victory (at best) for a regulatory regime that fell asleep at the wheel and allowed Wall Street to run the entire financial system into the ground, there will be no shortage of fanfare and congratulatory handshakes when the DOJ ‘proves’ how very serious it is by sending a few TBTF logos (but no actual people) to prison.

And so it was that Wall Street got to dictate the terms of its own guilty pleas and as egregious as that most certainly is, Swiss broker Tradition Financial Services just one-upped the bulge bracket in the race to prove that prosecutors are completely inept when it comes to punishing nefarious activity in the financial sector. As WSJ reports, Tradition found that convincing the UK to drop its case against the firm was as simple as not cooperating with the investigation. Here’s more

The police here have dropped a yearslong fraud and corruption investigation involving a major brokerage company after the firm, Tradition Financial Services, stopped cooperating with investigators, according to people familiar with the matter and correspondence reviewed by The Wall Street Journal.

 

The City of London Police, which investigates financial crime, opened a criminal investigation around 2011 into potential improprieties involving lavish spending and attempts to win overseas business by a number of Tradition brokers. Tradition had been cooperating with the investigation and has described itself to investigators as a victim of its former employees' fraudulent activity, the people said.

Tradition is a Swiss interdealer broker for OTC products and allegedly, its employees went to quite a bit of trouble to impress potential clients within the Gadhafi regime. Specifically, two Tradition brokers (Robert Bailey and Leslie Shackleford) won business with officials from the Libyan Investment Authority by flying them to desert villas in Marrakesh, Morocco which, thanks largely to the "wild parties" arranged by the brokers, was known to Libyan businessmen as the "no sperm left zone."

In any event, Tradition apparently began to reconsider its cooperation sometime last year, and by December had concluded that cooperating was not only cumbersome but was in fact costing a lot of money. That’s obviously no good, so the board - which, according to WSJ, is "where the alleged misconduct took place" - reviewed the matter and determined that "the benefits of a successful prosecution will be outweighed by the damage which will be done to it in the course of a prosecution." 

Well, yes. Typically the "damage" that one incurs from being prosecuted for a crime "outweighs" the "benefits" of the prosecution. That’s the whole idea. It’s not supposed to be a net positive for the criminal. 

But don’t tell Tradition that because incredibly, "London police last month informed lawyers representing former Tradition employees that the case was being dropped without further action, according to emails and people familiar with the matter."

The lesson here for Wall Street seems to be this: the next time someone tries to prosecute you for collusion, manipulation, fraud, and/or general malfeasance, don't settle for SEC waivers - just tell the authorities that upon reflection, you think it's best for your firm if the charges are dropped.