Chapter 2 Part 2: Boston Massacre - When Swiss Banking Goes Wrong

The new bosses from New York were not just arrogant. They were criminals. And Birkenfeld was about to find out just how deep the rot went at State Street.

The $780,000 Mistake

A fresh Harvard grad named Dan joined the currency desk. Birkenfeld tried to train him, but the kid would not listen. One Friday, Dan confirmed a huge purchase order for Japanese yen, then left early without verifying the trade with New York. Two months later the phone rang. Dan had reversed the order. Buy instead of sell. Loss: $780,000.

Instead of writing a check to the client, the New York bosses cooked up a scheme. They called Chemical Bank and said: on future trades, just mark up the price a little until you make back what we lost you. This practice was called padding. It was flat-out illegal.

Favoritism and Fraud

It got worse. When portfolio managers needed foreign currency, the desk would buy it all in one day across multiple trades. The fair thing was to spread the good and bad prices evenly. But the New York guys played favorites. They held all trade results until end of day, then gave the best deals to managers who kissed the right rings.

Birkenfeld started quietly keeping records. He copied every suspicious transaction and stashed them at his condo. Meanwhile the bosses got bolder. They issued false profit reports to pension fund clients. They forced managers to donate chunks of their Christmas bonuses to state treasurer campaigns. Those same treasurers then signed billion-dollar contracts with State Street. A bribe went to an Emirates official and they landed a $2 billion contract with the Abu Dhabi Investment Authority.

The Wiretapping Stunt

By 1994, Birkenfeld had been at State Street for five years and his conscience was eating him alive. Then came the last straw. The trading floor got a Dictaphone system to record phone transactions. Fine, except they were not telling clients they were being recorded. In Massachusetts, that is called wiretapping. Both parties must consent. It is a crime.

Birkenfeld stormed into his manager’s office. He took it higher up. Legal got involved. Their brilliant solution? A memo saying yes, this is technically illegal, but keep doing it anyway.

Birkenfeld refused to use the Dictaphone. They put him on probation. He still refused. Then two security officers showed up and told him he was “resigning.” He climbed on top of his chair and announced to the entire trading floor: “I am not voluntarily resigning from this institution!”

They took his badge and walked him out.

The Comeback Tour

The next day his buddy Gus snuck him back in by swiping his own badge twice at the elevator. Birkenfeld sat right back down at his desk. Security came again. This time they just fired him outright. “Works for me,” he said.

State Street offered one year salary as severance if he would sign a gag order. He told them no. He hired a lawyer, assembled a full dossier of the bank’s dirty dealings, and sent it to the chairman of the board. The chairman blew them off.

So Birkenfeld went to the annual shareholders meeting. He was still a stockholder. He sat through an hour of self-congratulation, then stood up and asked the chairman why the board had ignored detailed allegations of illegal conduct. 250 shareholders turned to stare. The chairman’s face went purple. The meeting was immediately adjourned for “doughnuts and coffee.”

The timing was brutal. It was April 19, 1995. That same morning, Timothy McVeigh bombed the federal building in Oklahoma City. Birkenfeld’s story never made the news.

Clowns, the FBI, and Whitey Bulger

For his final stunt, Birkenfeld hired two actual clowns with orange hair, red noses, and polka-dot outfits. He had them hand out 500 copies of an executive’s deposition subpoena in front of State Street headquarters during the lunch rush. The local news loved it.

But the real move was serious. That summer, Birkenfeld walked into FBI headquarters carrying a pile of documentation. Over six meetings, the agents went from skeptical to convinced. The FBI opened a formal investigation into State Street.

Then State Street hired the law firm Ropes and Gray. Their first move was to bring on a former FBI special agent to counter the investigation. That former agent started having lunches with the agent leading the case. The investigation quietly died.

Here is the kicker. The Boston FBI office in 1995 was the most corrupt in the country. These were the same agents protecting Whitey Bulger, the notorious gangster. They were taking bribes and covering up murders. Investigating a powerful bank was never going to be their priority.

Blackballed

State Street put the word out across Boston. Two banks that had offered Birkenfeld positions suddenly pulled their offers. He was done in that city.

So he packed his bags. If Boston did not want him, he would go somewhere far away. Somewhere a sharp young banker could start fresh and make a fortune.

Switzerland.

And that decision would change everything.

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Part of the Lucifer’s Banker Uncensored series