Heard on the Street
Investors Are Betting That Bank of New York
Will Emerge Unscathed From Investigation
By Wall Street Journal reporters Paul Beckett and Steve LeVine in New York and David Cloud
in Washington
10/03/2000
The Wall Street Journal
Page C1
(Copyright (c) 2000, Dow Jones & Company, Inc.)
Federal authorities hotly pursue an investigation into a huge money- laundering operation at Bank of New York Co. And one of the bank's former executives has pleaded guilty to conspiracy charges in the case and is cooperating with criminal prosecutors.
So what is Wall Street doing? Bidding up the bank's stock -- which has outpaced both the broader market and its peers since news of the investigation broke last year.
Investors effectively are betting that, despite intense scrutiny by both the U.S. attorney in Manhattan and the Manhattan district attorney, the bank will ride out the storm without facing criminal charges. And even if the bank eventually is criminally charged -- two grand juries related to the investigations still are sitting, though neither has had any witnesses in months, people familiar with the matter say -- investors believe the bank can handle the consequences, while maintaining its strong growth.
"The stock price is telling you it's a controllable risk," says Robert Bissell, president of Wells Capital Management, which has $81 billion under management. "The market tries to figure out whether someone knowingly got involved in dirty business, and the benefit of the doubt so far has gone to Bank of New York ."
Certainly he's giving the bank the benefit of the doubt. Wells Capital, the asset-management subsidiary of Wells Fargo & Co., increased its overall holding in Bank of New York by 381,470 shares in the second quarter, the latest for which data is available, to a total of 956,291 shares, according to mutual-fund holdings service bigdough.com. Wells declines to specify its holdings.
Since Aug. 18, 1999, the day before news of the investigation broke, shares of Bank of New York have surged 46% to $56.56 at 4 p.m. yesterday in New York Stock Exchange composite trading. By contrast, the Standard & Poor's 500 index has risen 7.8% during the same period; the major regional bank sector has dropped about 3% through Friday.
"That just says that the market is looking past the investigation and doesn't believe it is really material to the long-term outlook of the company," says Chris Bingaman, analyst at Villanova Capital, the asset-management arm of Nationwide Financial Services. Villanova also has loaded up on Bank of New York shares in recent months.
Gene March, manager of the $1.5 billion Armada Equity Growth Fund, owned by National City Investment Management Co., began snapping up BONY shares in May. They now comprise a little more than 1% of the fund. "As far as I can see, it's something you deal with, clean up the personnel, rewrite the regulations and go on," Mr. March says.
After it initially irritated investigators by failing to respond promptly to subpoenas, Bank of New York since September 1998 has been cooperating with authorities, who have tracked about $7 billion from Russia that flowed through three New York accounts at the bank. The vast majority of the money stemmed from Russian importers seeking to avoid Russian customs and taxes, though investigators have found traces of funds linked to Russian organized crime.
The three accounts were maintained by Russian emigre Peter Berlin, whose wife, Lucy Edwards, was a vice president in Bank of New York 's Eastern European division. The bank fired Ms. Edwards in August last year. She and Mr. Berlin in February pleaded guilty to a broad conspiracy to launder money in a New York federal court; the couple currently are cooperating with prosecutors.
BONY hasn't escaped recriminations altogether. It faces at least one class-action lawsuit and, earlier this year, the bank agreed to beefed-up compliance and audit functions as part of a civil-enforcement action by federal and state banking regulators.
But it appears that the market's bet that there's not much worse to come is sound, at least for now.
That is because federal prosecutors haven't yet uncovered any evidence implicating any of the bank's most senior executives in the scheme, according to two people familiar with the matter. A criminal case against Bank of New York "as an entity is unlikely to happen -- it is also unlikely against senior officers; they are not the focus," one person familiar with the investigation says.
Another senior law-enforcement official familiar with the probe adds: "To criminally convict, you need documents or recollections of meetings showing higher officers knew about illegal activity." So far, this official says, no such evidence had been found.
A spokesman for the U.S. attorney's office in Manhattan says only that the investigation is continuing. The Bank of New York declined to respond to any inquiries regarding this article.
Of course, if charges against the bank do result, Bank of New York could face a strong threat to its storied reputation as the nation's oldest bank and to some of its businesses. Many institutional clients shy away from doing business with a bank facing criminal charges.
For that reason, last year's guilty plea and agreement to pay a criminal fine of $60 million by Bankers Trust threatened to derail its planned $9 billion acquisition by Deutsche Bank, though the deal ultimately went ahead. (Bankers Trust pleaded guilty to three felony counts relating to the diversion of unclaimed customer funds to boost the bank's financial results.)
Yet investors appear unconcerned even about the potential impact of any charges on Bank of New York . Naturally, the impact would depend on their severity and the extent of the alleged wrongdoing. But that lack of anxiety stems partly from the fact that the bank processes such vast volumes of transactions that investors say they regard some problems -- even the movement of as much as $7 billion of suspicious money -- as almost inevitable. The question is more how the bank handled the problem once it surfaced.
"There's an understanding for people involved in processing that they will suffer unfavorable publicity from time to time," Mr. Bissell of Wells says. Bear Stearns, for instance, last year paid $38.5 million to settle civil and criminal charges that it contributed to securities fraud by processing trades for now-defunct brokerage A.R. Baron.
Bank of New York , after news of the investigation hit, "jumped all over it, and they put the problem squarely out there and dealt with it," Mr. Bissell adds.
Indeed, it is Bank of New York 's transaction-processing businesses that most appeal to investors -- and their performance hasn't been affected by the investigation. The bank in the past few years increasingly has focused on processing and other fee-based business and has de-emphasized its traditional commercial and consumer banking businesses. It is a leader, for instance, in handling American depositary receipts, which are U.S. securities issued by foreign companies that don't list their shares in New York.
In this year's second quarter, noninterest income (that derived from fees and commissions rather than interest-rate spreads) constituted 63% of total revenue, up from 61% the prior year. That mix also helped insulate Bank of New York from investors' jitters earlier this year, now largely assuaged, that the Federal Reserve would embark on a series of interest-rate tightenings, which could have hit the performance of other regional banks that are more sensitive to interest rates.
Moreover, Bank of New York also is protected from the kind of stock-market swings that hurt performance at other big banks that have become increasingly dependent on trading profits. It basically doesn't matter to Bank of New York which way the market moves, as long as there are trades for it to process.
Says Mr. Bingaman of Villanova: "They have an extremely defensible franchise with steady revenues and earnings streams." `
