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WASHINGTON — Concerned that targets of federal investigations are getting off lightly, two senators proposed legislation requiring the government to disclose all the details about settlements that allow companies to duck trials on allegations of wrongdoing.
The bipartisan legislation, unveiled Wednesday by Sens. Elizabeth Warren (D-Mass.) and Tom Coburn (R-Okla.), reflects concern on Capitol Hill that big banks such as JPMorgan Chase & Co. and other companies involved in the subprime housing boom and financial crisis often settle to avoid potentially steeper penalties and court costs.
Federal officials often tout the dollar amounts obtained in settlements, Warren and Coburn said, but those figures can be misleading because credits and tax deductions reduce the actual amount paid by the companies.
"Too often, the details of these agreements ... are hidden from the public," Warren said. "Agencies tout a top-line sticker price of the settlement but don't disclose significant details that dramatically alter the cost" to the companies.
Warren cited an $8.5-billion settlement last year between federal regulators and 10 financial firms over claims of deficient practices in servicing mortgages and processing foreclosures.
The settlement included $5.2 billion to modify homeowners' mortgages, but the public announcement left out a key detail: The companies got inflated credits for forgiving fractions of unpaid loans. A bank, for example, could get a $500,000 credit for reducing the balance of a $500,000 mortgage by just $15,000, she said.
With federal authorities seemingly stymied on criminal prosecutions stemming from the mortgage and financial crises, lawmakers are pushing for tougher terms in settlements.
Their efforts already are having an effect.
Securities and Exchange Commission Chairwoman Mary Jo White said last year that the agency would push for admissions of wrongdoing when settling some of its civil cases, reversing a policy of allowing companies and individuals to neither admit nor deny liability.
JPMorgan Chase & Co. admitted it broke securities laws in settling a case involving the loss of more than $6 billion in the so-called London Whale trades last year. And hedge fund billionaire Philip Falcone admitted wrongdoing in settling an SEC case that included an $18-billion penalty.
Warren had written to the SEC and other regulatory agencies last spring asking whether they had analyzed the costs to the public of allowing targets of investigations to settle without admitting liability.
Lawmakers in recent months introduced bills in the Senate and the House that would prohibit tax deductions by companies for penalties paid in government settlements.
On Tuesday, Justice Department officials pointed out that JPMorgan could not take a tax deduction for the $1.7 billion it agreed to pay to victims of Bernard L. Madoff's Ponzi scheme as part of $2.6 billion in settlements. Similar details weren't provided for the remaining amounts that went to other agencies and the Madoff bankruptcy trustee.
"This approach should serve as a standard in future settlements involving corporate wrongdoing," said Rep. Peter Welch (D-Vt.), who in October introduced the Stop Deducting Damages Act to prohibit write-offs for settlement penalties.
"A company that has harmed the public interest has no business reaching into the taxpayer's pocket to subsidize its penalty," he said.
The U.S. Public Interest Research Group, which issued a report last year criticizing the ability of companies to deduct settlement payments for their taxes, praised the legislation from Warren and Coburn.
"The fact that these two senators, who so often disagree, came together on this bill shows a broad consensus that governmental deal-making over corporate misdeeds should happen in full view of the public," said Francisco Enriquez, the group's tax and budget program associate.
"The public should know how much settlements are worth and whether they include hidden subsidies or sweeteners that taxpayers must ultimately foot the bill for," he said.
The proposed Truth in Settlements Act would require that all written public statements that refer to dollar amounts of settlements include explanations of how the penalties are categorized for tax purposes and whether the payments are offset by credits given to the company for taking certain actions.
Warren and Coburn specifically criticized the $25-billion national settlement reached in 2012 among federal and state officials and five large banks to resolve investigations into foreclosure abuse allegations. The amount was offset by $17 billion in credits given to the banks, "much of it for routine conduct," according to a fact sheet on the legislation.
The bill would require federal agencies to post basic information on their websites about settlements of more than $1 million, along with copies of the agreements. If a settlement is confidential, agencies would have to explain why.
Companies involved in settlements would be required to disclose in regulatory filings whether they deducted any of the payments from their taxes.
"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," Coburn said.
Warren said more public information would "shut down backroom deal-making" and help hold regulatory agencies more accountable to Congress and the public.
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