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US Is Seeking Felony Pleas by Big Banks in Foreign Currency Inquiry

The Justice Department is pushing some of the biggest banks on Wall Street — including, for the first time in decades, American institutions — to plead guilty to criminal charges that they manipulated the prices of foreign currencies.

In the final stages of a long-running investigation into corruption in the world's largest financial market, federal prosecutors have recently informed Barclays, JPMorgan Chase, the Royal Bank of Scotland and Citigroup that they must enter guilty pleas to settle the cases, according to lawyers briefed on the matter. The pleas would be likely to carry a symbolic stigma, if limited actual fallout, in handing felony convictions to some of the world's biggest banks.

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Yet even as those cases head toward negotiations over potential plea deals — a development that has not been previously reported — additional currency misconduct has surfaced in a New York state investigation, confidential documents show. The documents, excerpts from online chat rooms reviewed by The New York Times, suggest that banks designed electronic trading platforms that effectively drove up the price of currencies sold to clients. In the chats, replete with expletives and industry jargon, employees described and even joked about how the platform would cancel trades that ceased to be profitable for the bank.

Benjamin Lawsky, superintendent of the New York State Department of Financial Services.
Mike Segar | Reuters
Benjamin Lawsky, superintendent of the New York State Department of Financial Services.

New York's financial regulator, Benjamin M. Lawsky, initially focused on platforms at Barclays and Deutsche Bank, but he has since subpoenaed four other banks: Goldman Sachs, Credit Suisse, BNP Paribas and Société Générale. None of the banks have been accused of wrongdoing, and they are cooperating with the investigation.

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The Justice Department's plea deals, if ultimately reached, would not cover any wrongdoing that surfaces from Mr. Lawsky's investigation. Negotiations with the Justice Department are likely to center on which entity will plead guilty: the bank's parent company, or a subsidiary that housed the misconduct. The banks, which have argued that the wrongdoing was isolated to midlevel employees, prefer that a subsidiary take the fall.

The currency case is expected to ensnare traders but not top-level executives. As a result, it may add fuel to the criticism that prosecutors have not charged one top executive on Wall Street. Without charges to mollify the public anger over the financial crisis, the recent cases have presented little more than a pyrrhic victory for the Justice Department.

Still, the developments underscore a broader reality on Wall Street of late: One investigation begets another. With each settlement for money laundering, manipulating interest rates or aiding tax fraud, new cases crop up, often unearthed in the course of the previous investigation.

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The currency investigation would expand on those cases, which produced guilty pleas only from foreign banks. In pursuing cases last year against those foreign banks, Credit Suisse and BNP Paribas, prosecutors confronted the popular belief that banks had grown so important to the economy that they could not be charged.

After those deals set off few if any practical repercussions — the stocks of the banks actually jumped following the news — prosecutors in the currency case are now demanding pleas from JPMorgan and Citigroup, the lawyers said, in addition to Barclays of Britain and the Royal Bank of Scotland. The banks, before entering a guilty plea for any entity, will likely seek assurances that the charges would not prompt a revocation of their licenses or cost them any major business lines. If the banks resist, the Justice Department has warned that an indictment and ultimately a trial await.

For the Justice Department, the currency case represents a last opportunity to shape the white-collar legacy of Attorney General Eric H. Holder Jr., who has announced plans to step down once his replacement is confirmed. Blamed for the lack of criminal cases against Wall Street executives, Mr. Holder has emphasized that "no financial institution, at home or abroad, is too powerful to be held accountable for wrongdoing."

A Justice Department spokesman declined to comment, as did all of the banks under investigation. The lawyers briefed on the investigations spoke on the condition of anonymity because they were not authorized to discuss private settlement talks.

The Justice Department and the banks, the lawyers said, will most likely take weeks or even months to negotiate a settlement. The deals could be announced in close succession, if not on the same day.

The currency investigation began in earnest two years ago with the suspicion that traders across Wall Street manipulated the foreign exchange market, pushing prices up and down to suit their own holdings. Although foreign exchange is an enormous global market, with more than $5 trillion changing hands each day, it is one of the least regulated.

Banks eventually fired dozens of traders implicated in the scheme. Authorities around the globe scrambled to stake a claim to the investigation.

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In November, six banks sought to close the first chapter of the case, agreeing to pay a combined $4.25 billion to settle with financial regulators in Washington and Britain. The settlement, which included JPMorgan Chase, Citigroup, the Royal Bank of Scotland, UBS and HSBC, exposed the way banks colluded to manipulate currencies through emails and online chat rooms.

"He's sat back in his chair… feet on desk… announcing to desk… that's why I got the bonus pool," one trader remarked to a rival after they colluded on a rate, earning, according to regulators, a profit of $513,000 on the trade. Traders who collaborated to rig the market called themselves "the Players" and "the Three Musketeers."

On the eve of the settlement, Barclays withdrew from the deal over concerns that it would not completely resolve its liabilities. The bank had hoped that Mr. Lawsky's agency would join the pact.

Now that the Justice Department has opened settlement talks in the case, demanding guilty pleas for antitrust and fraud charges, Mr. Lawsky is likely to join. Each agency will assess its own fines, the lawyers briefed on the matter said.

The Justice Department might also pursue its own investigation into the electronic trading platforms under scrutiny by Mr. Lawsky, the lawyers said. Unlike the original currency investigation, which centered on the behavior of individual traders who altered currency prices to benefit their own positions, Mr. Lawsky's inquiry suspects a more systematic gaming of the currency markets through electronic trading platforms.

Over the last decade, many banks began to trade currencies through electronic platforms. Not all such platforms were meant to benefit the banks at the client's expense.

But late last year, Mr. Lawsky's agency began to scrutinize the platforms at Deutsche Bank and Barclays, as Bloomberg News reported in December.

In the confidential documents reviewed by The Times, it appeared that at least one bank steered certain clients to its platform, which provided the bank a moment to weigh its options in an otherwise high-speed environment.

For example, once a client agreed to buy euros at a certain price from a bank, the platform would detect whether the market had suddenly moved in a way that made the trade less profitable for the bank. The platform would then allow the bank to cancel the trade, possibly setting up a chance for the bank to eventually process the trade at a higher price.

In the online chat rooms, bank employees mocked their clients for not detecting the setup. And in some cases, when clients inquired about the cancellation, the banks falsely blamed a technical glitch.