try to settle the unprecedented criminal case the U.S. government filed this month. "No bank is going to want to have that potential liability," said Ronald Glancz, a partner at Venable, Baetjer, Howard & Civiletti in Washington. "It is a typical plea-bargain situation where the penalty is so Draconian that you want to resolve it for something less." The U.S. Attorney's office for the southern district of New York charged the Japanese bank on Nov. 2 with defrauding regulators and obstructing justice after it allegedly covered up $1.1 billion in trading losses. Daiwa officials pleaded not guilty to the charges at a Nov. 9 hearing. Officials at the U.S. Attorney's office and at Daiwa declined to discuss the case. Lawyers who have studied the government's 37-page indictment said they expect Daiwa to try to settle the case, but said Uncle Sam would control the conditions. "The government clearly has the upper hand," said M. Hatcher Norris, a partner at Butler, Norris & Gold in Hartford, Conn. If Daiwa lost the case, its fine would be determined under federal sentencing guidelines, which consider how much the bank benefited by the fraud or how much its customers lost, said Samuel Buffone, a partner at Ropes & Gray and a former chairman of the American Bar Association committee studying the sentencing guidelines. Federal prosecutors are expected to peg Daiwa's fine to the $377 million in customer-owned securities that senior vice president Toshihide Iguchi sold without permission. According to the sentencing guidelines, the obstruction of justice charges and the size of the bank would require the judge to multiply the $377 million loss by a factor of two to four. That could result in a $1.5 billion penalty. Of course, prosecutors could try to play hardball and peg the fine to the entire $1.1 billion Mr. Iguchi lost during the past decade in unauthorized government securities trades, Mr. Buffone said. "I don't think it is too far-fetched that you could come up with a theory that the $1.1 billion was the gain or loss," he said. "That means you could be looking at $4.4 billion" in fines. For any chance of a smaller fine, Daiwa needs to persuade the prosecutors to ask the judge to depart from the sentencing guidelines, which are federal rules intended to ensure consistency in punishments. "You have to have a basis in the guidelines to depart downward," said Mr. Norris who is also past president of the Connecticut Criminal Defense Lawyers Association. "The government, to a large measure, controls those downward departures." The bank's best option is to ask the prosecutor to file a special motion attesting to the institution's cooperation in the probe, Mr. Norris said. Prosecutors, flexing their muscles, also are employing several new laws against Daiwa, said John K. Villa, a partner at Williams & Connelly and author of "Banking Crimes." "There are three aspects to this indictment which, if they don't break new ground, certainly are on the cutting edge of legal theory on the interrelationship of federal banking regulation and federal criminal law in a ways that ought to be troubling to banking lawyers and banks," he said. Prosecutors claim Daiwa obstructed the examination of a financial institution, conspired to deprive the government of its right to regulate foreign banks, and failed to report Mr. Iguchi to law enforcement officials. These laws, which Congress created in the wake of the savings and loan scandal, are extremely broad, giving prosecutors enormous power to target banks. They could return to haunt the entire industry if the court allows them to be used against Daiwa, he said. "It would be a dangerous precedent, a step down the wrong road," and the government should rely on more conventional charges, he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.