FINMA issues a reprimand against Bank Leumi (Switzerland) AG based on the actions of its Geneva branch

The circumstances are as follows.

In December 2007, the Swiss Federal Banking Commission (SFBC) received a request for administrative assistance from the French financial supervisory authority (Autorité française des marchés financiers, AMF). The AMF was conducting an enquiry into an instance of insider trading involving the security X. As part of the enquiry, the SFBC was asked to clarify the circumstances surrounding transactions made involving said security by the Geneva branch of Bank Leumi (Switzerland) AG (Bank Leumi) in the autumn of 2007. The transactions took place as follows. On 28 September 2007, client A contacted the Geneva branch and instructed them to buy X securities on the French market. Following the call, the Geneva branch decided to buy X securities for its managed clients B and C. No client had a written asset management contract. Due to an IT malfunction, the bank's electronic system did not register the orders properly in the bank's records. In addition, the relationship manager who input the orders into the system deliberately entered certain false dates when finalising the order. When the SFBC asked the bank's Compliance department for details of the transactions made on 28 September 2007, the latter found the record of securities transactions to be unreliable and the client files incomplete. It therefore had to reconstruct the key items of information called for from statements given by staff at the Geneva branch. Based on this information the SFBC decided it had to forward the names of the clients to the AMF.

At this stage a lawyer approached the SFBC on behalf of clients A, B and C. The lawyer was also a member of the firm that was acting as external legal counsel for the Geneva branch at that time. At the lawyer's behest and based on a specimen letter drafted by the lawyer, the Geneva branch decided to issue a first letter to the SFBC, on bank-headed paper, indicating that the bank had recommended the X security to clients A, B and C. Three weeks later a second letter, confirming the contents of the first letter and written with the lawyer's cooperation, was drafted by the Geneva branch and sent by the lawyer to the SFBC to support his proper allegations. The two letters, written on bank-headed paper, aimed to mislead the SFBC so as to persuade it that client A, as well as clients B and C, had been advised by the bank. Their purpose was for the SFBC to consider clients A, B and C as uninvolved third parties to prevent their names being given to the AMF. The two letters were signed jointly by relationship managers from the branch, in contact with the external lawyer, and by the head of the Geneva branch, at the express request of the lawyer who wanted to give more authority to the letters.

In spring 2008, the bank's Compliance department became aware of the matter and immediately informed the SFBC. The regulator then opened an enquiry into the bank's dealings. In the course of this enquiry the bank actively cooperated in establishing the incriminating facts. It rapidly identified its failings and rectified them.

In its ruling of 20 July 2009, which has since come into force, FINMA noted that Bank Leumi had committed a serious infringement of its guarantee of irreproachable activity according to art. 3 c of the Swiss Federal Law on Banks and Savings Banks by (1) failing to comply with the regulations governing the maintenance of records of securities transactions and the files of its clients with discretionary asset management mandates; (2) not having suitable organisation for its business activity, particularly by failing to identify and appropriately manage the conflict of interest involving its own lawyer; (3) voluntarily relaying incorrect information to the SFBC as part of the execution of a request for administrative assistance. FINMA has ordered the publication of an extract of the decision in application of art. 34 LFINMA.

Once they were apprised of the facts, the Board of Directors and the General Management of the bank pre-empted the FINMA ruling by taking the necessary steps to restore legal order.

FINMA has initiated criminal proceedings, amongst others against the lawyer of the clients involved in the administrative assistance procedure.