Scandal Rocks Bank Criminal Charges Loom In Daiwa Trading Scheme

A courtroom confession of a top-level conspiracy at Daiwa Bank could open up senior managers and even the bank itself to criminal charges in a $1.1 billion bond-trading scheme, white-collar law experts said Friday.

Moreover, the Japanese bank may have unwittingly incriminated itself by conceding it allowed the illegal bond-trading to continue before reporting it to authorities.

However, U.S. authorities may avoid crippling charges against Daiwa for fear of hurting already fragile U.S.-Japanese relations.

“From a federal regulatory standpoint, you don’t take out the A-bomb where a scalpel will serve its purpose,” said John Stoppelman, a Washington lawyer who is a former chairman of the Securities and Exchange Commission’s task force on investigation rules.

Toshihide Iguchi, a former bond trader in Daiwa’s New York branch, pleaded guilty Thursday to doctoring records to cover up $1.1 billion in losses from unauthorized trading over 12 years. He also confessed to a conspiracy involving at least two senior Daiwa managers.

Iguchi said the senior Daiwa managers urged him to continue the cover-up of the losses in the last two months, after he told Daiwa’s president in mid-July about the years of deception. He didn’t identify the managers.

So far, only Iguchi has been charged in the federal probe, which is continuing. But Iguchi’s confession and new assertions from prosecutors cast fresh doubt on Daiwa’s portrayal of Iguchi as a rogue trader who single-handedly hid his bond-trading losses.

Federal prosecutors asserted Thursday that Daiwa filed a quarterly financial report with the Federal Reserve on July 31 without disclosing the losses that the bank had learned of 11 days earlier. In the report, Daiwa said it still held $600 million in Treasury bonds that the bank knew Iguchi had actually sold to cover losses.

“If it can be proven that others aside from Iguchi knew and participated in the cover-up, then you can prosecute the bank as well as individuals,” said Bruce Baird, a Washington lawyer who used to head the securities and commodities fraud unit of the U.S. Attorney’s office.

“If an employee of even a modest amount of supervisory authority does something and in part it’s for the company’s benefit, you’re going to have potential corporate criminal liability.”

Among possible federal charges against management or the bank, he said, is the concealing of vital financial information from federal regulators and the failure to report an employee suspected of criminal conduct.

One task of federal prosecutors investigating the case is to try to corroborate Iguchi’s assertions with other witnesses or bank records.

But political reality may intrude. When federal prosecutors have gone after corporate entities in recent years, the results sometimes were devastating to the target firm. Criminal charges can irreversibly taint a company, particularly financial institutions whose businesses are built on trust.

In one recent foreign-bank case, Bank of Credit & Commerce International collapsed in 1991 after criminal fraud charges that it had booked non-existent loans and deposits to inflate its asset base and profits.

Junk-bond firm Drexel Burnham Lambert Inc. died in 1990 after pleading guilty two years earlier to six felonies and paying $650 million to settle securities fraud charges.

With Japanese banks already awash in $400 billion in bad loans stemming from risky lending policies in the 1980s, charges against Daiwa could jeopardize already sensitive relations between the United States and Japan.