Sad But True: Corporate Crime Does Pay
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Last year’s SEC settlement regarding Citigroup’s fraudulent mortgage investment practices fits that pattern. The settlement was for $285 million, less than 4 percent of Citigroup’s $76 billion in revenues.
Often federal penalties are so low they might be viewed as an invitation to break the law. According to the Times, Citigroup had cheated investors out of more than $700 million, more than twice what it paid in penalties.
As for Glaxo’s $3 billion settlement, George Lundberg, for 17-years Editor-in-Chief of the Journal of the American Medical Association writes, “The penalty sounds like a lot of money but that company made probably 10 times that much from its illegal actions.”
What can be done? A first step might be for the media to stop reporting simply the gross settlement figure and instead give us the information that allows us to decide whether the punishment fits the crime. A few days ago a brief story in the New York Times business section admirably achieved this goal.
The Times reported that in 2006 Morgan Stanley entered into a complex swap agreement with the New York electricity provider KeySpan that gave it a stake in the profits of a competitor. This enabled the two companies to push up the price of electricity. Morgan Stanley broke the law. On August 7 a federal judge approved the settlement between the Justice Department and Morgan Stanley.
Here’s the cost benefit analysis. The total cost to New Yorkers in higher utility bills because of the price fixing came to $300 million. Morgan Stanley was paid $21.6 million for handling the swap agreement. And the financial penalty imposed on Morgan Stanley? An inconceivably low $4.8 million. In addition the bank didn’t have to admit any wrongdoing. There will be no further prosecution.
Anyone who read this story had all the facts necessary to conclude that something is terribly, even criminally wrong here. The Times is to be commended for going that extra step and providing a full cost-benefit analysis. I hope it can become a template for all political and business reporters.