Regulators Order Daiwa To Close U.S. Authorities Press Criminal Charges Against Bank Officials

Federal authorities Thursday ordered Daiwa Bank Ltd. to shut its U.S. operations and announced a sweeping criminal indictment against the Japanese bank and senior managers, accusing them of directing a cover-up of $1.1 billion in bond trading losses.

It is the biggest U.S. criminal action against a foreign bank since authorities charged Bank of Credit & Commerce International in 1991 with recording non-existent loans and deposits to inflate its assets and profits.

The indictment shows that authorities believe the cover-up, initially blamed by bank management on one rogue New York bond trader, actually reached up the ladder of Daiwa Bank.

“At every turn, impermissible, unlawful options were selected by a number of (bank) officials, and that we can’t tolerate,” U.S. Attorney Mary Jo White said in announcing the indictment at a Manhattan news conference.

Daiwa bank could face more than $1 billion in fines if convicted on federal charges including obstructing examinations of its branches, making false statements to federal agencies, and forging records.

The bank issued a statement saying it intends to defend itself against the criminal charges and that in agreeing to the order shutting U.S. operations, it was not admitting wrongdoing.

Daiwa said it viewed the decision by U.S. prosecutors to file criminal charges as “regrettable and unfortunate.”

It continued to portray itself as a victim of a scheme hatched by Toshihide Iguchi, a senior bond trader in its New York office, who last month pleaded guilty to hiding the $1.1 billion loss over 12 years.

Federal and state banking regulators said Daiwa, based in Osaka, Japan, has signed a consent order agreeing to end its activities in 11 states by Feb. 2. There is the possibility of an extension to permit an orderly departure.

Daiwa’s U.S. operations include an asset management business, a commercial lending operation and other banking services.

The joint announcement by the Federal Reserve, the Federal Deposit Insurance Corp. and officials from New York, California, Illinois, Massachusetts, Florida and Georgia said Daiwa has agreed to cooperate with an investigation by regulators, providing its books and records.

Other than BCCI, international banking experts couldn’t recall another instance where U.S. authorities shut down a foreign bank for supervisory reasons. “It could be unprecedented,” said John B. Cairns, partner and international banking expert at Willkie Farr & Gallagher, a New York law firm.

A spokesman at the Federal Reserve said the action against Daiwa is the first time the central bank has used enhanced powers under a 1992 law to shut down a foreign bank. But he said the Fed joined with the Comptroller of the Currency in 1992 to shut down a small Saudi-owned bank, National Commercial Bank.

In making the announcement, regulators said Daiwa “engaged in a pattern of unsafe and unsound banking practices and violations of law over an extended period of time that are most serious in nature.”

Prosecutors accused senior Daiwa executives of meeting with Iguchi at the end of July at a Manhattan hotel to discuss how he could hide his trading losses. They agreed at the time that Iguchi should continue a cover-up by selling securities and forging bank records, the indictment said.

Iguchi last month told a federal judge that his superiors directed him to continue covering up his losses in the two months before the bank publicly disclosed the scandal on Sept. 25. He pleaded guilty to forging bank records and embezzlement to hide the spectacular losses.

On Thursday, Masahiro Tsuda, the former manager of Daiwa’s New York branch, was indicted, along with the bank.

In a statement, Daiwa lashed out at the indictments.

“Blaming Daiwa Bank in the criminal courts for thievery and other unauthorized activities makes no sense. It is clear that the bank remains the sole victim of Mr. Iguchi’s wrongdoing,” said Takashi Kaiho, Daiwa Bank’s new president.

Kaiho said the bank agreed to the shutdown of its U.S. offices to avoid “conflict” with U.S. authorities.