By Michael Rothefeld and Brent Kendall
August 18, 2010
A federal judge criticized as “a sweetheart deal” the proposed $298 million settlement that would allow Barclays PLC to avoid prosecution for altering financial records to hide the movement of funds into the U.S. from Iran, Cuba and other prohibited countries.
At a hearing Tuesday in Washington, U.S. District Judge Emmet G. Sullivan applied the brakes on an agreement made public Monday by U.S. and New York prosecutors. “Why isn’t the government getting rough with these banks?” the judge asked.
In a reference to Barclays, based in London, the judge said the proposed agreement as filed is “an accommodation to a foreign bank, and that concerns me.”
Judge Sullivan, who has chastised the U.S. government in other company-related settlements, demanded that lawyers return to his courtroom Wednesday prepared to address his concerns. He could reject the deal after hearing the arguments.
A Justice Department lawyer said the $298 million agreement is “well in excess” of what Barclays earned by processing payments from countries under U.S. economic sanctions over an 11-year period that ended in 2006. The money would be divided evenly between the U.S. government and Manhattan district attorney’s office. Barclays declined to comment after the hearing.
The judge’s comments are the latest example of what some legal experts call a pattern of increasing displeasure from the bench about how the U.S. government is resolving investigations of major financial institutions.
The trend began with last year’s rejection by U.S. District Judge Jed Rakoff in New York of a proposed $33 million settlement by Corp. of Securities and Exchange Commission civil charges that the Charlotte, N.C., bank misled shareholders about bonuses at Merrill Lynch & Co.
The judge eventually approved a revised $150 million settlement, but his resistance and prodding of the SEC likely encouraged other federal judges to take a tougher stance, said Peter Henning, a law professor at Wayne State University in Detroit.
The bank plans to pay $298 million to settle claims by U.S. prosecutors that it altered financial records for more than a decade to hide hundreds of millions of dollars that flowed to the U.S. from nations like Cuba, Libya and Iran. Michael Rothfeld discusses. Also, Jerry Seib discusses why isolationism, protectionism and anti-immigration sentiment is growing as the economy slumps.
On Monday, U.S. District Judge Ellen Segal Huvelle in Washington refused to approve the SEC’s $75 million settlement with Inc. over the bank’s disclosure of subprime-mortgage problems, saying she is “baffled” by the proposed deal. She scheduled a follow-up hearing for mid-September.
Legal experts say the comments suggest judges believe their approval of the proposed settlements is viewed as a fait accompli by lawyers for the government and companies.
It is much more common for judges to push back in criminal cases where settlements must be in the public interest than in civil cases reached between private parties. But the government’s use of so-called deferred prosecution agreements has fueled criticism that companies are getting off easy.
“It’s a delicate balancing act,” Mr. Henning said about weighing the benefits of a quick, cost-effective settlement against terms that are sufficiently tough and fair. In the Barclays case, criminal charges against the U.K. bank would be dismissed after two years if Barclays meets certain conditions. So far, no bank employees have been charged.
James Cox, a law professor at Duke University in Durham, N.C., said some of the same questions raised in the Bank of America case by Judge Rakoff could be asked about the proposed Barclays settlement. “If there was a basis for a violation here, just who were the culpable officers?” Mr. Cox said. “Why aren’t they contributing any money? I think it’s a feeling that we’ve played this game long enough.”
Joseph Warin, chairman of law firm Gibson, Dunn & Crutcher LLP’s litigation department in Washington, said it would be unusual for Judge Sullivan to reject the Barclays settlement. “What is absolutely clear is that the parties have worked very hard on this,” said Mr. Warin, who isn’t involved in the Barclays case.
In 2006, Judge Sullivan scrutinized antitrust agreements in Inc.’s acquisition of MCI Inc. as well as the former SBC Communications Inc.’s takeover of Corp. He approved the pacts after concluding that they were in the public interest.
Deferred-prosecution agreements between the U.S. government and , PLC and the former ABN Amro Holding NV over processing payments from sanctioned countries were approved by federal courts. Judges signed off on two of the settlements without hearings.
A person close to Barclays said executives were comfortable with the $298 million penalty partly because the amount is less than the $350 million that Lloyds agreed to pay last year to settle similar accusations. Barclays felt the smaller fine sent an important signal about the relative severity of the allegations against Barclays, according to this person.
—David Enrich contributed to this article.