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Financial Fraud Law

Do We Need a ‘Truth in Settlements Act’? Two Senators Say Yes

 On the heels of J.P.Morgan Chase’s $2.05 billion settlement with federal prosecutors over its oversight of Bernard Madoff’s operations, U.S. Senators Elizabeth Warren (D-MA) and Tom Coburn (R-OK) have introduced bipartisan legislation, the “Truth in Settlements Act,” that they believe would increase transparency around settlements reached by federal enforcement agencies.

In a statement, they said that when federal agencies close investigations and settle cases, “they often tout the dollar amount obtained from the offender.” In many cases, according to the Senators, that amount “is misleading because of tax deductions and other ‘credits’ built into the settlement that reduce the settlement's true value.”

Worse, the Senators said, agreements sometimes were deemed confidential, with key details or even the fact of a settlement hidden from the public. They said that their bill would require more accessible and detailed disclosures about these agreements to allow the public to hold regulators accountable for the true value of these deals.

"When government agencies reach settlements with companies that break the law, they should disclose the terms of those deals to the public," said Senator Warren. "Anytime an agency decides that an enforcement action is needed, but it is not willing to go to court, that agency should be willing to disclose the key terms and conditions of the agreement. Increased transparency will shut down backroom deal-making and ensure that Congress, citizens, and watchdog groups can hold regulatory agencies accountable for strong and effective enforcement that benefits the public interest."

"Taxpayers deserve to know the settlement details corporations arrange with the government, and the best place for Congress to start is with policies that enhance transparency," Senator Coburn said. "Since agencies are not currently required to disclose the financial structure of government settlements, too often the true value of those settlements is not known because often companies are allowed to deduct part of the payment. Our bill gives taxpayers the transparency tools they need to access real information and numbers regarding enforcement settlements."

Under the bill, all written public statements that reference the dollar amounts of settlements would be required to include explanations of how those settlements are categorized for tax purposes and whether payments may be offset by "credits" for particular conduct. Companies that settle with enforcement agencies would be required to disclose in their Securities and Exchange Commission filings whether they have deducted any or all of the dollar amounts of their settlements from their taxes; and federal agencies would be required to post basic information about settlements and provide copies of those agreements on their websites.

The bill also would require agencies to explain publicly why confidentiality is justified in any particular instance. It would direct agencies to disclose basic information about the number of settlements they deem confidential each year and direct the Government Accountability Office to conduct a study of confidentiality procedures and to provide additional recommendations for increasing transparency. According to the Senators, these and other provisions of the bill would will increase the transparency of government settlements and permit greater public scrutiny.

It may be worth noting that the $1.7 billion JPMorgan settlement was non-tax deductible, in the form of a civil forfeiture, according to U.S. Attorney Preet Bharara. 

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