The U.S. Justice Department often touts the value of cooperation in white-collar cases—we've got a spotlight this week on how in-house lawyers spoiled a bank's chance of receiving full credit. Scroll down for a look at the career of Coinbase's chief legal officer, who is in the thick of regulatory issues involving digital currencies. And there's a new Deloitte report on regtech. Welcome to Compliance Hot Spots.

Thanks for reading—and please do send feedback. I appreciate hearing from you about what's on your plate—observations, trends, new clients. I'm at [email protected] and 202-828-0315, or follow me on Twitter @cryanbarber.

 

How Not to Receive Full Cooperation Credit

 

To cooperate or not? It's always a thorny question in the white-collar space. We recently got a prime new example of some thinking from the U.S. Justice Department about the harm of failing to fully cooperate. Or, more specifically: How to tick off prosecutors.

Let's look at the case against the Swiss-owned bank Zürcher Kantonalbank, the fourth largest bank in Switzerland.

ZKB, as the Swiss government-owned bank is known, came under scrutiny from federal investigators for its work helping U.S. citizens avoid taxes by hiding hundreds of millions of dollars in offshore accounts. In December 2012, three bankers at ZKB were charged with aiding those efforts. To avoid any conflict of interest, ZKB retained independent U.S. counsel for them.

Behind the scenes, and away from the bankers' outside counsel in the United States, the arrangement didn't work out to be terribly independent, according to the Justice Department. Between 2013 and 2015, in-house counsel for ZKB and human resources personnel regularly met with two of the bankers and made statements that dissuaded them from exploring the possibility of cooperating with U.S. authorities.

Those meetings, which weren't attended by the two bankers' outside lawyers, cost ZKB. Under a deferred prosecution agreement resolving the criminal charges, ZKB agreed to pay $98.5 million—an amount that reflected a 50 percent reduction of the cooperation credit the bank might have received if not for its meetings with the two bankers, Stephan Fellmann and Christof Reist, who each pleaded guilty to one count of conspiracy. Read the Justice Department's deferred prosecution agreement here.

The statement of facts within the deferred prosecution agreements shed more light on the alleged missteps on ZKB's in-house counsel. “In-house counsel informed Fellmann and Reist that it was the bank's view that they should wait to resolve their criminal cases in conjunction with ZKB reaching a resolution with U.S. authorities because it would be in the bankers' best interests to resolve their cases along with the bank rather than separately.”

From those discussions, Fellmann and Reist “felt that their continued employment at ZKB and ZKB's ongoing payment of their legal fees would be threatened should they take steps that were viewed by ZKB as inconsistent with the bank's own interests. Due in part to these discussions, Fellmann and Reist did not seek to cooperate with the United States until the summer of 2015,” the document said.

Hogan Lovells white-collar partner Michael Kelly put it like this in a tweet: “Swiss bank's in-house counsel dissuaded individuals from cooperating with the government. Result: DOJ deducted cooperation credit from the bank's deferred prosecution agreement and increased the penalty imposed on the bank.” My colleague Sue Reisinger wrote up a good piece at Corporate Counsel: “Here's a sure way to lose half your cooperation credit in a federal investigation: Let your in-house counsel advise employees not to cooperate with U.S. prosecutors.”

ZKB's lawyer, Philip Urofsky of Shearman & Sterling, declined to comment.

The chairman of the ZKB board of directors said: “We are relieved that after seven years, we were able to conclude the investigation following an objective dialogue with the US authorities. The solution that has now been reached marks the end of this matter and removes any related uncertainties.”

Manhattan U.S. Attorney Geoffrey Berman said in a statement: “The bank enabled taxpayers to hide accounts from the IRS and actively sought to win the business of Americans looking to evade taxes. After doing so, ZKB dissuaded the two bankers from cooperating with U.S. authorities, which has today resulted in a reduction in the bank's cooperation credit. The substantial financial penalties imposed on the bank, and the two bankers' pleas, should make clear that helping U.S. taxpayers to be tax evaders will not be tolerated.”

 

Compliance Reading: Special Report on Wall Street Firms | Regtech in Focus

 

>> Forgot about regtech? New analytics tools aren't part of most compliance updates, according to a new study from Deloitte. Rebecca Chasen, a risk and financial advisory partner with Deloitte in Boston, said the most disappointing part of the survey was the “lack of advancement” in the use of analytics and predictive technologies to help compliance functions look ahead. “The adoption is still in its infancy. People are just starting to really put their toes in the water here,” she added. “When you talk about the technologies, it's expensive, it's broad and then there's the nascency of some of the tools.”

>> “As financial markets undergo rapid technological changes and regulatory turmoil, the competitive landscape for high-end legal work in transactions and capital markets is also shifting,” according to a new report in The American Lawyer. More reading from my colleagues Christine Simmons and Gina Passarella: A Crack in the Wall: Elite Wall Street Firms Are Being Put to the Test. Key takeaway: “With a decline in financial services litigation and a potential market correction on the horizon, the business model of Wall Street's elite may be tested.”

>> Former Hunton Andrews Kurth partner William Wehrum represented companies challenging EPA rules and regulations. Now, he's a lead EPA lawyer in the Trump administration. Ethics advocates are raising questions about how significant a role he has played in drafting rules that would benefit former clients, according new reporting in The New York Times. We've got a copy of Wehrum's financial disclosure here. Wehrum reported a $2.1 million partner share. His corporate clients included American Petroleum Institute, Utility Air Regulatory Group, Koch Industries and the American Fuel & Petrochemical Manufacturers. Wehrum told the Times he is following all ethics restrictions in his post at the EPA.

>> Meanwhile, a D.C. Circuit panel assailed Trump's EPA for delaying an Obama-era rule that would impose new requirements for chemical disaster prevention and coordination. The panel—Judith Rogers and Robert Wilkins—said the EPA had given no genuine justification for pushing back the compliance date to 2019. The judges called the delay a “mockery” of federal law. The ruling is worth a read—and illuminates, as The Washington Post reports, how hard it is to undo some regulations. Brett Kavanaugh was on the panel but did not participate in the vote.

>> Coinbase's chief legal officer, Mike Lempres, opens up about his role—and challenges faced—at the San Francisco-based company. “Regulatory procedures in government are set up in such a way that they move slowly,” Lempres told mycolleague Caroline Spiezo. “Crypto moves very, very fast. And it's a real challenge.”  

>> It's not every day that Trump takes to Twitter about the SEC (or any other arcane, independent agency, for that matter). But on Friday, he used some of his “executive time” to fire off a tweet suggesting that the SEC take publicly traded companies off the quarterly-reporting treadmill and instead require financial reports every six months. It's actually prompted a healthy debate about the virtues and shortcomings of the quarterly reporting schedule, which has been criticized for taking executives' eyes off of long-term objectives in favor of short-term success. But there's some question of whether that criticism holds water.  

 

Who Got the Work

 

>> Brownstein Hyatt Farber Schreck is representing the Embassy of Saudi Arabia on a $125,000 monthly contract running Jan. 1, 2018, to the end of the year, per a filing at the Justice Department. If you missed it, a team from Covington & Burling—including Robert Kelner, head of the firm's election and political practice and a lead attorney for Michael Flynn—recently posted a piece addressing the new wave of enforcement under the Foreign Agents Registration Act.

>> Stephen Fishbein and John Nathanson of Shearman & Sterling helped Citigroup negotiate a $10.5 million settlement with the SEC resolving two separate complaints, including one related to bad loans made by its Mexican subsidiary. The SEC found that Citigroup and its subsidiary “lacked the controls necessary” to vet fraudulent documents that the firm Oceanografia submitted to obtain about $3.3 billion in loans between 2008 and 2014. The SEC said Citigroup “ignored numerous red flags that should have led to discovery of the fraud,” which resulted in about $475 million in losses for the bank. [Reuters]

Promotions and New Hires

>> Panasonic Avionics has named Catherine Razzano as its chief compliance officer, four months after the manufacturer of in-flight entertainment systems agreed to pay $280 million to resolve charges it violated anti-bribery laws. Razzano was previously an assistant general counsel at General Dynamics Corp., where she focused on the company's compliance with anti-bribery laws, export controls, economic sanctions and other trade embargoes, anti-boycott regulations and anti-money laundering laws. [Compliance Week]

>> Holland & Knight said Tuesday it acquired a six-lawyer team from Sharp Partners led by Tampa-based firm founder William Sharp Sr., a tax lawyer who played a key role in the 2008 crackdown on Swiss bank accounts, my colleague Roy Strom reports. The firm also hired James “Chip” Cottrell Jr., a former global chief ethics officer at Deloitte.

New hire or promotion? I'm all ears. Reach me at [email protected] and 202-828-0315.