Credit Suisse Was Alerted to Private Banker’s Misconduct Years Before Criminal Charges


Credit Suisse Group AG


CS 1.74%

overlooked red flags for years while a rogue private banker stole from billionaire clients, according to a report by a law firm for Switzerland’s financial regulator.

The private banker, Patrice Lescaudron, was sentenced to five years in prison in 2018 for fraud and forgery. He admitted cutting and pasting client signatures to divert money and make stock bets without their knowledge, causing more than $150 million in losses, according to the Geneva criminal court.

The regulator, Finma, publicly censured Credit Suisse in 2018 for inadequately supervising and disciplining Mr. Lescaudron as a top earner, and said he had repeatedly broken internal rules, but it revealed little else about the bank’s actions in the matter. Credit Suisse said it discovered Mr. Lescaudron’s fraud in September 2015 when a stock he had bought for clients crashed.

However, the report, commissioned by Finma in 2016 and reviewed by The Wall Street Journal, found Mr. Lescaudron’s activities triggered hundreds of alerts in the bank that weren’t fully probed in the 2009-15 period studied. In addition, around a dozen executives or managers in Credit Suisse’s private bank knew Mr. Lescaudron was repeatedly breaking rules but turned a blind eye, proposed lenient punishment for his misconduct or otherwise glossed over the issues because he brought in around $25 million in revenue a year, the report found.

It said Mr. Lescaudron’s “disregard of internal directives and guidelines, the inadequate safeguarding of client documentation as well as unauthorized settlements of client transactions had been known to the bank since June 2011.”

The report found the irregularities were analyzed and escalated to a certain extent, but not enough. “None of the parties involved felt responsible for conclusively analyzing the already known as well as the resulting questions and drawing the necessary conclusions,” it said.

A business-risk manager who reported some of the incidents to superiors told law-firm investigators that he had feared further escalation would be seen as disloyal or that he would lose his job, according to the report.

Credit Suisse lost a bid last year in Switzerland’s Supreme Court to prevent the 272-page report by Swiss law firm Geissbühler Weber & Partner from being accessed by Geneva prosecutors still investigating the bank over the matter.

According to the report, the bank fired two executives after its own investigations into the fraud, and three more got written sanctions in their employment files.

A Credit Suisse spokesman said the report was part of the early stages of the review Finma concluded in 2018. It said the review “did not reveal any facts that would support the criminal complaints against Credit Suisse.” After Finma’s 2018 rebuke, Credit Suisse said it had improved its systems and added hundreds more compliance staff.

A Banker’s Fraud Unfolds

Credit Suisse banker Patrice Lescaudron stole from clients for years, making trades without their permission and moving money between their accounts to cover losses. Here’s how it played out, according to a law firm’s report and court documents:

  • 2004: Mr. Lescaudron joins Credit Suisse without any banking experience.
  • 2008: Mr. Lescaudron gets a verbal warning over an unauthorized client transaction.
  • 2009: Credit Suisse undergoes one of several restructurings that fracture oversight and reporting lines around Mr. Lescaudron.
  • 2011: Credit Suisse systems flag undocumented direct trades among clients of Mr. Lescaudron, including in Raptor shares, sparking a probe.
  • 2012: Credit Suisse’s fraud-prevention unit and a business-risk manager escalate those and other problems involving Mr. Lescaudron.
  • 2013: Mr. Lescaudron receives a written warning for unauthorized transactions and for entering implausible client information in bank files.
  • 2014: Raptor shares held by Mr. Lescaudron’s clients climb above 10% of the company’s stock, triggering an internal ban on more purchases. Mr. Lescaudron is nominated for promotion.
  • 2015: Further Raptor shares are purchased despite the internal ban. The stock plunges on bad company news and Mr. Lescaudron’s fraud is discovered. Credit Suisse fires him. The bank investigates the fraud, leading to two more people being fired.
  • 2017: Mr. Lescaudron is charged by Geneva prosecutors with fraud, forgery and criminal mismanagement.
  • 2018: Mr. Lescaudron is found guilty and sentenced to five years. Finma censures Credit Suisse, saying it failed to adequately supervise him.

Mr. Lescaudron served a two-year pretrial detention and was released in 2019. He killed himself last year.

Finma declined to comment. The law firm said it couldn’t comment. The Geneva prosecutor’s office declined to comment on its investigation. A lawyer for Mr. Lescaudron’s family declined to comment.

The Journal reviewed a copy of the law firm’s April 2017 report obtained by some former clients of Mr. Lescaudron who formed a group called CS Victims. The former clients include Bidzina Ivanishvili, a billionaire former prime minister of Georgia who is suing Credit Suisse in Singapore and Bermuda for around $800 million, alleging breach of trust. Credit Suisse is contesting Mr. Ivanishvili’s claims and denies any wrongdoing.

A spokesperson for CS Victims said the report shows Credit Suisse ignored alerts and warnings and had multiple opportunities to prevent Mr. Lescaudron’s crimes but chose not to. The spokesperson said the bank “must now accept responsibility and compensate the clients without delay.”

The law firm’s report said it didn’t find misconduct by Credit Suisse employees executing Mr. Lescaudron’s falsified orders. But it said the fact the orders could be falsified for so long without anyone noticing showed weaknesses in the bank’s antifraud measures.

The high-profile case is among several controversies that have bruised Credit Suisse’s standing with shareholders and the global rich who expect it to be a fortress for their money. Finma started enforcement proceedings in September over the bank’s handling of employee surveillance after a spying scandal, and Swiss federal prosecutors charged it with failing to prevent money laundering through the bank by a Bulgarian criminal organization and an employee more than a decade ago.

In January, Credit Suisse said it would post a fourth-quarter 2020 loss because of an $850 million legal charge for toxic security sales.

Credit Suisse said it was cooperating with Finma in the spying enforcement proceedings and would incorporate lessons learned. It denies the allegations in the federal criminal charges.

Chief Executive

Thomas Gottstein

said in December the bank would be more disciplined to avoid future litigation.

Mr. Lescaudron joined Credit Suisse in 2004 after working for a cosmetics company in Russia and as an auditor. He hadn’t worked in banking but swiftly became one of the bank’s top revenue producers as a handler to Russian and post-Soviet state billionaires.

In 2008, he was verbally warned over an unauthorized client transaction, the first of four disciplinary measures in his time at the bank, according to the report.

Between 2010 and 2015, emails from Mr. Lescaudron to Mr. Ivanishvili’s representative set off more than 180 alerts for possible data breaches, the report found. It said the bank didn’t analyze those alerts and emails in detail, and that Mr. Lescaudron was able to conceal his actions for years by sending clients spreadsheets he made instead of official account statements, breaking bank rules.

At his trial, Mr. Lescaudron said the self-produced spreadsheets were central to his fraud.

Former Georgian Prime Minister Bidzina Ivanishvili is suing Credit Suisse for around $800 million, alleging breach of trust.



Photo:

david mdzinarishvili/Reuters

In 2011, the bank’s security services reviewed personal accounts of Mr. Lescaudron at Credit Suisse after an antifraud system flagged some large deposits. He received a verbal warning for not correctly disclosing external bank and brokerage accounts, according to the report.

That summer, the same antifraud system detected undocumented direct share trades among three of Mr. Lescaudron’s clients that should have gone through multiple checks, the report said.

Some of the trades were in a California drugmaker, Raptor Pharmaceutical Corp., whose stock Mr. Lescaudron had bought for himself, too.

The alerts set off multiple probes within the bank into the transactions, including into whether Mr. Lescaudron had recommended the Raptor shares to clients or profited at their expense, and whether there was any relationship between the clients in the trades.

The law firm’s report found the bank still hadn’t clarified the issues a year later, and that some of the people studying the transactions and trades among clients had only partial information, or thought it was someone else’s job to figure out what was going on.

Part of the problem, according to the report, was that Mr. Lescaudron’s supervisors and the control staff around him changed frequently as the bank and his division went through a series of restructurings after the 2008 financial crisis.

In summer 2012, according to the report, risk managers in the private bank discovered Mr. Lescaudron had entered incomplete or implausible information about client backgrounds and the origin of their funds, to meet a deadline from compliance. The breach, along with the issues from 2011, led to disciplinary proceedings.

The business-risk manager who raised the alarm on the problems stacking up around Mr. Lescaudron said the bank should consider firing him. Instead, in early 2013, Mr. Lescaudron got a written reprimand and a small deduction from his 2012 bonus. A plan was made to split Mr. Lescaudron’s client activities so that he no longer executed transactions. But it took more than six months to implement and wasn’t sufficiently monitored, according to the report.

In August 2014, an internal controls group banned new purchases of Raptor shares for Mr. Lescaudron’s clients because the stake at the bank hit a 10% threshold requiring filings to the Securities and Exchange Commission. The ban wasn’t enforced, though, and more Raptor shares were bought for the clients, the report found.

That year, Mr. Lescaudron’s bosses nominated him for promotion to managing director, which was rejected, according to the report.

In September 2015, Raptor reported disappointing drug-trial results. Its shares sank, prompting margin calls on positions some of the clients didn’t know about. Credit Suisse questioned Mr. Lescaudron and quickly fired him.

At his trial, Mr. Lescaudron said by then he had given up trying to cover up the fraud. He said his aim was always to make big returns for his clients, and some money for himself, too. He apologized to Credit Suisse, former colleagues and his clients for his actions.

A former boss testified that he couldn’t explain how the activities weren’t detected. A bank lawyer told the court Credit Suisse’s control systems overall had functioned well in monitoring Mr. Lescaudron.

Write to Margot Patrick at margot.patrick@wsj.com

Copyright ©2020 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8



Source link