Jessica Masulli Reyes, and Saranac Hale Spencer

The News Journal

Former U.S. Attorney General Eric Holder was widely criticized in 2013 for suggesting that the nation's largest banks are too big to jail.

In Delaware, the addition this week of Wilmington Trust as a defendant to the criminal indictment already pending against four top-tier bank executives stands in contrast to that.

Some say the indictment could send a message that banks will no longer be immune to criminal prosecution and could signal a prosecutorial push to hold financial institutions accountable.

"This is absolutely part of a shift," said Brandon Garrett, author of "Too Big to Jail: How Prosecutors Compromise with Corporations" and a law professor at the University of Virginia School of Law. "The Department of Justice has been responding to criticism of the way bank cases were handled."

The indictment, announced by Delaware's U.S. Attorney Charles M. Oberly III in a news release Wednesday evening, was heralded as the first against a bank that received federal bailout money under the Troubled Asset Relief Program, and is the latest in the downfall of the once-proud institution founded by du Pont family members.

A spokeswoman for Oberly's office said there would be no further comment Thursday. Another spokesperson for M&T Bank, which assumed Wilmington Trust's assets and liabilities when it purchased the bank at a steep discount in 2010, also declined to comment, citing the pending litigation.

Experts, however, weighed in on what the indictment means, not only for M&T Bank, but also for the future of prosecuting banks.

The indictment charges the executives and bank for their roles in concealing from federal regulators and bank shareholders the total amount of past-due loans on Wilmington Trust’s books, a move that painted a rosier picture of the bank's finances.

"I applaud [the prosecutors] for doing this," said Dennis Kelleher, president of the financial reform group Better Markets. "Frankly, there is no reason a bank should be treated as some special, untouchable corporate entity in the United States."

The impact on M&T

In 2008, the U.S. Treasury invested $330 million in Wilmington Trust through TARP bailout money. Two years later, Wilmington Trust was brought to its knees with the real estate crash in Kent and Sussex counties, and in one of the biggest fire sales in banking history, agreed in October 2010 to be sold at a stunning discount to M&T Bank Corp of Buffalo, New York.

The deal resulted in shareholders taking huge losses and more than 600 employees being cut from the workforce.

Shareholders could now be facing even more uncertainty with the inclusion of Wilmington Trust in the indictment.

The bank became a wholly-owned subsidiary of M&T, meaning that it is still in existence as Wilmington Trust, but all of its shares are owned by M&T.

Wilmington Trust had $2.8 billion in assets, according to the most recent regulatory filing in 2014 from M&T, said Bruce Grohsgal, a business law professor at Delaware Law School.

By including Wilmington Trust in the indictment, that money comes into play for any potential fine or restitution that might come out of the case. M&T could also be on the hook for any regulatory consequences of its subsidiary, such a risk of suspension or debarment and financial fines, Garrett said.

Bringing the bank itself into the fold was necessary in order to "make whole" those who lost money because of the alleged criminal conduct, Oberly said in his statement on Wednesday.

"It's extremely unlikely there will be any material consequences to M&T itself," said Kelleher. "Unfortunately we know from what the feds have done to bigger banks, such as for rigging the foreign markets, the criminal conduct was egregious and longstanding, but they still made sure there were no material consequences to the bank."

Going after compensation for those who lost money might be a worthy goal, said Larry Hamermesh, a professor at Delaware Law School, "but, who's paying for it?"

It could, effectively, cost shareholders double. Those who were impacted by the initial sale could end up paying the price for any financial penalties leveled against the bank, Hamermesh said.

The other side of the coin is the larger impact of the prosecution, he said – it could send a message to other banks and corporations to obey the laws.

The future of prosecuting banks

Holder was blasted for failing to bring any prosecutions of top banking executives and banks during his tenure.

"The Justice Department was sharply criticized for failing to indict HSBC for money laundering in late 2012 as being too big to jail," said Grohsgal.

The Wilmington Trust case could be part of a larger trend to indict banks and their executives, Garrett said.

He pointed to an announcement earlier this year that five major banks pleaded guilty to criminal charges and paid more than $5.5 million in penalties to settle charges that their traders routinely manipulated the world's foreign-exchange markets.

"We have started to see in the past two years federal prosecutors have been much more willing to indict and convict banks," he said. "They are doing everything the critics are hoping for."

The Office of Special Inspector General for the federal Troubled Asset Relief Program has also previously said there are cases nationally of larger banks that are still under investigation, but that they can take time to prosecute.

Garrett has seen that prosecutors are still more willing to go after smaller banks, like Wilmington Trust, because it can be easier to prove which employees knew about wrongdoing.

In the case of Wilmington Trust, four former senior bank executives – David Gibson, Robert V.A. Harra, William North and Kevyn Rakowski – were indicted over the summer. Their cases are still pending and are scheduled for trial in September.

However, five other employees have pleaded guilty as part of the Wilmington Trust investigation. Three of those convictions are from former bank officials, including Delaware market manager Brian Bailey, but none have been sentenced yet.

"In this case, it's somewhat uncommon that you would have so many senior officers involved in, on the other hand you had a bank in clear distress," Kelleher said. "They either follow the law and face the music of the market, the consequences of the market, or they make the wrong decision and try to hide or cover up bad economics, which can lead to a criminal conduct."

Contact Jessica Masulli Reyes at (302) 324-2777, jmreyes@delawareonline.com or Twitter @JessicaMasulli.Contact Saranac Hale Spencer at (302) 324-2909,sspencer@delawareonline.com or on Twitter @SSpencerTNJ.