SAC Capital Shouldn’t Receive Tax Windfall for Insider Trading and Securities Fraud

Media Releases

Taxpayers Could Shoulder a $350 Million Hidden Tax Subsidy Unless Agencies Prevent It


Statement by Francisco Enriquez, U.S. Public Interest Research Group Tax and Budget Associate, on the $1 billion settlement related to civil and criminal allegations that SAC Capital Advisors is reportedly discussing with the SEC and other federal agencies.

“In their effort to hold SAC Capital accountable for insider trading that was, according to the indictment, ‘substantial, pervasive, and on a scale without known precedent in the hedge fund industry,’ the SEC and other federal agencies must also protect taxpayers by ensuring that the firm does not receive a massive tax windfall for its wrongdoing. Unless regulators explicitly forbid SAC Capital from writing off a $1 billion settlement as a tax deduction, taxpayers could end up indirectly shouldering 35 percent of the cost of the settlement.

“Allowing companies to write off the cost of their settlement agreements dilutes the effectiveness of federal law enforcement.  Just in March, SAC Capital settled with the SEC for $600 million for separate charges related to an insider trading scheme involving a clinical trial for an Alzheimer’s drug being jointly developed by two pharmaceutical companies.

“Companies won’t learn that crime doesn’t pay so long as taxpayers pick up the tab for their legal settlements.

“Federal law forbids companies from deducting public fines and penalties from their taxes, but payments made as part of a settlement are treated differently. Companies that negotiate penalties through a legal settlement typically manage to deduct these penalties as a tax write-off. In essence, companies are allowed to receive a tax subsidy for their wrongdoing.

“Agencies must be explicit about prohibiting the write-off, as the SEC did with Goldman Sachs in 2010 and the EPA and State Department typically do.

“When corporations deduct their settlement costs by treating them as an ‘ordinary and necessary’ cost of doing business, ordinary Americans are left to pick up the tab. Every dollar that companies write off must be paid for through cuts to public programs, higher taxes or more government debt.  That is unacceptable.

“Congress should close the settlement loophole to stop corporations like SAC Capital from ripping off the American taxpayer.”

You can read U.S. PIRG’s report on the tax implications of legal settlements, “Subsidizing Bad Behavior: How Corporate Legal Settlements for Harming the Public Become Lucrative Tax Write-Offs.”

U.S. PIRG’s research and analysis of legal settlements has been featured in the New York Times, the Washington Post, and the Associated Press.

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U.S. PIRG, the federation of state Public Interest Research Groups, is a consumer group that stands up to powerful interests whenever they threaten our health and safety, our financial security, or our right to fully participate in our democratic society.