By Michael Rapoport And Rachel Louise Ensign
New York's top banking regulator on Monday indefinitely
suspended Promontory Financial Group from some consulting work,
saying the firm had watered down and compromised its compliance
efforts for U.K. bank Standard Chartered PLC.
Promontory said it plans to take the New York Department of
Financial Services to court to fight the suspension, which would be
a rare legal challenge to the authority of the New York banking
regulator. The department has been aggressive over the last two
years in combating what it sees as conflicts of interest at
consulting firms like Promontory that work for New York-regulated
banks.
Promontory could file a request in court for a stay of the
regulator's action early this week, a person familiar with the
situation said.
"We will litigate the matter and defend our firm against this
regulatory overreach," Promontory said in a statement.
Promontory, which is based in Washington, D.C., was founded in
2001 by Eugene Ludwig, a former U.S. comptroller of the currency,
and positions itself as a "bank doctor" to help banks with their
compliance before they get in trouble with the government. The firm
has hired a number of former regulators, including Mary Schapiro,
the former Securities and Exchange Commission chairman, who is now
vice chair of the firm's advisory board.
Standard Chartered has agreed to pay nearly $1 billion in
multiple settlements in recent years with the Nydfs and other
regulators over its handling of transactions that originated in
countries like Iran, Libya and Sudan that were subject to U.S.
economic sanctions.
Promontory was hired in advance of those settlements to prepare
reports to regulators about the bank's conduct. According to the
department, Promontory improperly altered and toned down its
findings.
Both at the bank's request and on its own, Promontory softened
language and removed red flags that would have highlighted the
bank's misconduct, the Nydfs said. In one case, the department
said, the bank's counsel asked for language in a Promontory report
to be made "more bland." In another, the bank's counsel allegedly
told Promontory to replace "potential violations" with a more
ambiguous and innocuous phrase.
"[N]o question the bank is going to have a big problem in trying
to present some of these figures...and our report can go a long way
toward softening the blow...," a Promontory senior analyst wrote in
January 2011, according to the Nydfs.
Promontory "exhibited a lack of independent judgment" in its
work for Standard Chartered, and some testimony from Promontory
witnesses during the department's investigation "lacked
credibility," the Nydfs said.
In some cases, witnesses' testimony directly contradicted the
plain language of emails they themselves had written, the
department said, and the testimony was "not plausible or
credible."
The Nydfs has been investigating Promontory since 2013, but
settlement talks broke down last week, a person familiar with the
situation said. Promontory had offered to pay a settlement of
around $20 million, but wouldn't agree to an admission of
wrongdoing or a suspension, said two people familiar with the
situation. The department, meanwhile, was asking for $15 million
plus an admission of wrongdoing and suspension, one of the people
said.
The discord between the two sides escalated further on Friday
when lawyers for Promontory sent Anthony Albanese, acting
superintendent of the Nydfs, a letter asking for the investigation
to be transferred to another agency since former superintendent
Benjamin Lawsky's new consulting firm now competes with Promontory.
Mr. Lawsky couldn't be reached for comment.
Promontory's legal basis for challenging the department's
authority wasn't immediately clear. Consulting firms are hired for
compliance work for New York-regulated banks that get into hot
water with the Nydfs, but those engagements must be approved by the
department, and the department said it intends to deny any such
engagements for Promontory "until further notice," barring any
change in circumstances.
"This is clearly a desperate and baseless attempt by Promontory
to distract from the conduct outlined in our report, which speaks
for itself," said a spokesman for the Nydfs.
Promontory said the department's investigation had found "no
substantive errors."
The Nydfs has been targeting consultants who review and help
banks with regulatory issues, over concerns that they could be
subject to conflicts of interest because the same banks whose work
they assess also hire and pay them.
Two other firms, Deloitte LLP and PricewaterhouseCoopers LLP,
have previously agreed to settlements with the Nydfs over similar
allegations.
Deloitte agreed in 2013 to pay $10 million and accept a one-year
ban from consulting for New York regulated banks over its
anti-money-laundering work for Standard Chartered. PwC agreed in
2014 to pay $25 million and accept a two-year suspension over its
work for Bank of Tokyo-Mitsubishi UFJ, which agreed in 2013 to pay
$250 million to settle similar allegations as those against
Standard Chartered.
A Bank of Tokyo-Mitsubishi spokeswoman declined to comment. A
Standard Chartered spokeswoman couldn't immediately be reached for
comment.
Write to Michael Rapoport at Michael.Rapoport@wsj.com and Rachel
Louise Ensign at rachel.ensign@wsj.com
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