How to compound your regulatory problems

Credit Suisse headquartersRegulatory reports show that has failed to investigate one of its private bankers despite many years of warnings. It is unfortunately not an isolated issue.

Any firm has its share of bad apples, but Credit Suisse seems to be compounding legal and issues.

The Lescaudron scandal

Here are the main facts of the story:

  • Mr. Patrick Lescaudron joined Credit Suisse in 2004, with no banking experience but a cluster of relations with Russian-speaking wealthy individuals.
  • In 2008, he gets a verbal warning for unauthorized transaction.
  • In 2011, after a reorganization at the firm, systems flag undocumented trades between clients of Mr. Lescaudron, notably in Raptor shares, which sparked a probe.
  • In 2012, the fraud prevention unit escalate the issue. The following year, Mr. Lescaudron receives a written warning for entering implausible client information in the firm’s systems.
  • In 2014, Mr. Lescaudron’ s clients now own more than 10% of Raptor’s outstanding issue, preventing any further purchase. Mr. Lescaudron is promoted.
  • In 2015, further shares are purchased, despite the ban. That year, the stock price plunges on bad news. His frauds are discovered and he is fired. Two more individuals are fired after an internal investigation. A report is commissioned by FINMA, the Swiss regulator. It found hundreds of alerts during the 2009-2015 period. They were known to the bank, but not investigated by, since at least 2011.
  • In 2017, Mr. Lescaudron is charged by Geneva prosecutors.
  • In 2018, Patrick Lescaudron, who had admitted to creating fake excels and to copy-pasting client signatures to divert money, is sentenced to five years in prison for fraud and forgery. He had amassed a personal fortune of CHF 32 million (with the usual houses, Ferraris, paintings, Rolex…), but was ordered to repay $130m. FINMA publicly censures Credit Suisse for lack of supervision and lack of action.
  • In 2019, Mr. Lescaudron kills himself.
  • In 2020, Credit Suisse lost its bid to prevent the 2018 FINMA report to be disclosed to the Swiss authorities.

The case naturally begs the question of why were warnings not investigated for so long.

Other contributing elements:

  • The private banker generated $150 m of losses in his investment bets. It is likely that his frauds could have been ongoing if it was not for the large Rapstor loss.
  • A risk analyst was scared to lose his job if he was escalating the issues further.
  • A group of investors, notably the former prime minister of Georgia, Bidzina Ivanishvili, is suing CS for $800m. Credit Suisse denies any wrongdoing.
  • Credit Suisse says that “it has improved its systems and procedures”, etc.

Legal woes

Now, Credit Suisse has a laundry list of legal issues these last few years:

Here is my modest grain of salt. If you want to avoid always larger provisions and profit warnings, maybe you could avoid those legal issues in the first place? Maybe change the corporate culture? Just say’n.

 

Credits

Credits to Margot Patrick at The Wall Street Journal.

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Written by Gontran de Quillacq

Gontran de Quillacq is an expert witness and a legal consultant. He is a recognized authority in options, trading, derivatives, structured products, portfolio management, hedge funds, mathematical finance, quantitative investment, strategy research and financial markets in general.

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