Supporters of Daiwa Bank are criticizing the government for continuing to prosecute the Japanese institution even though banking regulators have ordered it to close its U.S. operations by Friday.
Federal prosecutors are moving forward with a criminal prosecution of the bank for taking 57 days to notify U.S. regulators of $1.1 billion in losses from unauthorized bond trades.
The government's criminal charges include mail fraud, failure to report a felony, and defrauding the U.S. government - all serious crimes that could cost the bank $1.3 billion in fines.
Daiwa's supporters said other, U.S.-based financial firms that have committed similar transgressions were either punished by regulators or pursued by prosecutors, not both. Daiwa also is defending itself by noting it followed directions from Japanese regulators, did not take so very long to notify U.S. regulators, and was concerned about spurring a banking crisis at home.
Maybe its best argument is that no customers were hurt by Daiwa's losses.
"There was no harm here done to anybody but the bank," said a source familiar with Daiwa's case. "To hear the U.S. attorney run around and say she needs a fine of $1.3 billion is serious science fiction."
Granted, Daiwa's supporters clearly have a bias. But their insights add perspective to a story that, to date, has been based solely on documents and statements from federal prosecutors.
Daiwa's supporters, all of whom requested anonymity, compare the bank's predicament to those of E.F. Hutton and Salomon Brothers - financial firms caught in illegal schemes.
Brokers at Salomon tried to corner a government securities auction in 1991, and E.F. Hutton pleaded guilty to 2,000 counts of check kiting in 1985.
Regulators and prosecutors never worked in tandem to deliver a one-two punch to those firms, Daiwa's advocates said.
Daiwa's case also is different because no one but the bank lost money. The other firms' transgressions "are situations where the investors are never going to recover their money," one Daiwa supporter said. "Compare those with Daiwa, and you see a bank that was victimized by a trader."
The bank's supporters also say 57 days is not much time, considering the bank had to verify the confession of $1.1 billion in losses made in a July 21 letter from bond trader Toshihide Iguchi to Daiwa's president. These supporters contend that any major bank would have done the same after receiving such a rambling letter from an unknown employee saying he had lost a billion dollars.
"The response was, 'Holy mackerel, let's investigate and find out what's going on,'" said a source familiar with Daiwa, adding that the loss has never grown beyond the $1.1 billion the bank first disclosed.
The banking crisis in Japan added to the delays, Daiwa's supporters said. Two major credit unions had just failed, making the markets there particularly vulnerable to news of a big loss at a major bank. Daiwa wanted a plan to cover the loss before the news broke, the supporters said.
They also point to a meeting with Japanese regulators that occurred shortly after the bank first learned of the loss. During a meal at a bank- owned guest house, Daiwa came clean. Regulators responded with silence, which the bank took as a sign supporting further investigation.
The bank's supporters concede that Daiwa broke several U.S. laws. It mailed false reports to the Fed, making the bank guilty of mail fraud and defrauding the U.S. government. But they said those crimes occurred as the bank was trying to grasp the magnitude of the loss.
The indictment includes 18 counts claiming the bank is responsible for Mr. Iguchi's crimes. These 18 charges particularly irk Daiwa's supporters. These laws are supposed to target companies that benefit from an employee's illegal activities, such as a trucking company whose driver gets into an accident after being forced to work extra hours.
The laws aren't meant for firms that took a few extra weeks to report a massive theft, Daiwa's supporters said.