Case Example

The secrecy protection available with the Named Account is based upon the strict laws and banking practices in the jurisdiction. For most people, the protection under this system is adequate for any circumstance which is conceivable. However, it is true that some bank employees will have access to the account agreement with the name and signature of the customer and this human factor may compromise security in some unusual circumstances.

An example of the human factor at work is the case of Dennis Levine. In the early 1980s Levine was a managing director at the investment bank of Drexel Burnham. At the time, the takeover craze was sweeping Wall Street. Acquiring companies often paid well over the current stock price causing the stock of the takeover candidate to zoom skyward. Inevitably, some individuals had access to inside information about which companies were to be acquired before the information was available to the public. As a result, these individuals were in a position to make huge sums of money by buying the stock or options of the target company prior to the public announcement. This insider trading, as tempting as it is, is illegal in the United States.

Because of his position within the investment banking community, Levine had significant access to insider information and was determined to take advantage of every opportunity to profit. To generate additional valuable information, he recruited into his scheme several friends from some of the prominent law firms involved in the takeovers.

Intending to trade based upon these sources, Levine opened an account at the Bahamas office of Bank Leu, a leading Swiss bank. When he wished to purchase stock or options in a company, Levine called his contact at the bank and the transaction was carried out under the name of the bank. After the takeover was announced and the stock rose to the full price, Levine would have the bank sell his position. From 1980 through 1985, Levine traded in the stock of fifty-four companies based on the inside information he acquired. His initial deposit of $100,000 grew to nearly $12 million. Not surprisingly, Levine failed to report this income on his tax returns or pay the tax on this amount.

At the time the Bank Leu account was established, Levine took all significant precautions. Although he executed a signature card in his own name, information about the account was limited to the bank manager, Bruno Pletscher, and several high level employees. His account executive at the bank was Bernhard Meier.

The problem with Levine’s careful plan was that after his first few trades resulted in substantial profit, Meier began to piggyback Levine’s trades for his own account. That is to say, Meier copied Levine’s trades to make himself a profit—a clear breach of every banking policy. Then the broker at Merrill Lynch, in New York, where the trades were executed, joined in the fun and began copying the trades for his account.

The Securities and Exchange Commission eventually put together the pattern of activity in the stock of takeover candidates and was able to trace the source of the trading back to Bank Leu. Although the Bahamas secrecy laws would have shielded the name of Dennis Levine from the SEC, the fact that Meier, an employee of the bank, was engaged in criminal insider trading, caused severe pressure to be exerted on the bank by U.S. authorities. Because Bank Leu felt that Levine had involved it in a criminal scheme, the bank was unwilling to protect him under the circumstances. Levine ultimately pleaded guilty to securities law violations and tax fraud and was sentenced to five years in prison.

The Dennis Levine case is interesting because it demonstrates the limitations of bank secrecy, at least in the Bahamas. This was not simply a matter of a customer depositing funds from an illegal source. Levine had Bank Leu make illegal trades on his behalf, exposing the bank to criminal prosecution in the U.S. No legitimate institution will knowingly risk its reputation and its business for a customer engaged in criminal activity.

Secondly, banks are composed of human employees. Under most circumstances, the bank secrecy laws will be effective in preventing any unwanted disclosure. And in fact, over the last fifty years, with millions of depositors in the offshore jurisdictions, there have been only a handful of cases of disclosure. But because there are humans involved, mistakes can be made.