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Oct. 10 — A proposed individual prohibited transaction exemption that would allow Credit Suisse AG-affiliated qualified professional asset managers to continue to rely on a 1984 PTE despite violation of the conditions of the exemption by the bank has drawn sharp rebuke in a letter from three members of Congress as well as two public comment letters filed with the Department of Labor.
The three House Democrats, Rep. Maxine Waters (D-Calif.), Rep. Stephen F. Lynch (D.-Mass.) and Rep. George Miller (D.-Calif.), sent a letterto the DOL on Oct. 9 requesting that the agency hold a hearing on the application and expressing their concerns that the Zurich-based banking company wasn't being held sufficiently accountable for its May guilty plea on charges of criminal conspiracy to assist in tax evasion.
In addition to the congressional letter, two public comment letters have been filed objecting to the exemption and requesting a public hearing: Tim Blixseth, the former real estate investor who used a $375 million loan from Credit Suisse to fund a now-bankrupt real estate project in Montana filed his letter on Sept. 13 and Public Citizen, a nonprofit public advocacy organization filed its letter on Oct. 7.
When contacted by Bloomberg BNA for comment, DOL spokesman Mike Trupo could only confirm that the department had received the congressional letter and was reviewing it and that the Credit Suisse application remained pending.
Representatives from Credit Suisse didn't reply to Bloomberg BNA requests for comment.
The application for an exemption by Credit Suisse AG follows the bank's May 19 guilty plea in the U.S. District Court for the Eastern District of Virginia to one count of conspiracy to aid in the preparation and presentation of false income tax returns.
Two days after the plea was entered, the Employees Retirement System of Texas, which manages more than $25.4 billion in assets for state workers halted trading with Credit Suisse.
The pension system cited a policy against hiring firms convicted of felonies as the main reason for its trading suspension.
The Federal Reserve Bank of New York and the Securities and Exchange Commission have both allowed Credit Suisse to maintain its status as a primary dealer and investment adviser, respectively, after the plea was entered.
In September, Credit Suisse applied for a PTE that would allow it to continue to serve as a QPAM despite the condition in its original PTE, which specifically required that the QPAM or its affiliates not be convicted of certain types of criminal activity, including income tax evasion.
The three House Democrats who wrote to the DOL seeking a public hearing on the application expressed their view that the full weight of regulatory power hadn't been brought to bear on institutions such as Credit Suisse when they are found to have violated U.S. laws.
According to the letter, the DOL has granted every one of the 23 applications for a PTE that it has considered since 1997. “When the Department simply waives the disqualification provisions on a seemingly automatic basis, it undermines firms' incentives to obey the law,” the members said.
In requesting that the DOL hold a hearing as to whether the PTE is warranted, the members of Congress pointed to the Texas retirement system's decision to suspend trading with the bank and warned that granting the waiver “reflexively” might lead to a situation where some financial institutions might be seen as “too big to bar.”
In its letter, Public Citizen also requested a public hearing on the application and expressed its view that the exemption shouldn't be granted.
The group points to the clear language of the QPAM rules, which terminates privileges for any entity if it or any of its affiliates is convicted of a list of various crimes, including income tax evasion.
According to the letter, the cost of Credit Suisse liquidating its investments related to its actions as a QPAM would be approximately $450,000, which the group considers to be a “rather minimal liquidation cost” should the exemption be denied.
In its letter, the group did acknowledge a proposal by the DOL to subject Credit Suisse to an independent auditor that would undertake “extensive training and subsequent compliance review” as an additional safeguard should the department grant the waiver.
However, Public Citizen warned that such a procedure would need additional monitoring and oversight by the DOL and urged the department to take the “simpler and more efficient” path and simply deny the exemption in the first place.
In his letter to the DOL, Blixseth detailed a litany of what he categorized as Credit Suisse's “long and exhaustive history of disregard for laws of the United States and other countries.” As part of that, he included both the guilty plea that generated this application as well as the bank's dealings with his own finances.
Blixseth, who has been granted permission by the court considering the bank's sentencing on its guilty plea to file a written submission in the case, detailed his own dealings with the bank as evidence for why the DOL shouldn't grant the exemption.
According to his letter, the bank's dealings with him related to a $375 million loan were structured in such a way as to route the funds through the Cayman Islands and thus evade and subvert U.S. banking laws.
The loan was the centerpiece of the Chapter 11 bankruptcy case of Blixseth's exclusive “millionaires only” Yellowstone Club in Montana, after he allegedly transferred $209 million of the loan money to his personal accounts, leaving the club incapable of paying its debts.
The DOL hasn't yet made a determination on the exemption application, and the sentencing for the criminal case is currently scheduled for Nov. 21 in Norfolk, Va.
To contact the reporter on this story: Matthew Loughran in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Dana Domone at email@example.com
Text of the House letter is at http://op.bna.com/pen.nsf/r?Open=sdoe-9prpbe.
Text of Public Citizen's letter is at http://op.bna.com/pen.nsf/r?Open=sdoe-9prmca.
Text of Blixseth's letter is at http://op.bna.com/pen.nsf/r?Open=sdoe-9prman.
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