Letter to Christopher Cox, Chairman of the U.S. Securities and Exchange Commission, Re: Taxpayers Should Not be Left to Pay SEc Penalties Aimed at Financial Institutions

Letter

Letter to Christopher Cox, Chairman of the U.S. Securities and Exchange Commission, Re: Taxpayers Should Not be Left to Pay SEc Penalties Aimed at Financial Institutions

GRASSLEY SAYS TAXPAYERS SHOULD NOT BE LEFT TO PAY SEC PENALTIES AIMED AT FINANCIAL INSTITUTIONS

Senator Chuck Grassley today said the Securities and Exchange Commission needs to protect taxpayers by considering increasing any payments it may require of financial institutions for misleading investors about the safety and liquidity of auction-rate securities. Reports indicate the SEC is currently investigating such activity.

Grassley said "if these financial institutions are allowed to deduct these payments from their taxable income, that would amount to a tax windfall for these financial institutions that is paid for by U.S. taxpayers."

The issue of the tax deductibility of certain payments by financial institutions arose in 2003 in connection with a $1.4 billion global settlement between the SEC and 10 financial institutions over allegations that the institutions misled investors regarding certain corporations to attract business from corporations underwriting these corporations' securities.

That year, Grassley and Senators Max Baucus and John McCain introduced the Government Settlement Transparency Act, which would have made clear that payments made to acknowledge actual or potential violations of any law would not be tax-deductible. The legislation was never passed by Congress.

Grassley said that until such a common sense proposal becomes law, "the SEC needs to do what it can to make sure that the after-tax amount of the payment reflects the amount that the SEC actually intends to be paid by the financial institution."

The text of the letter Grassley sent today to the SEC Chairman follows here, along with news releases, letters and statements issued by Grassley, Baucus and McCain in 2003.

August 15, 2008

The Honorable Christopher Cox
Chairman
U.S. Securities and Exchange Commission
100 F Street, NW
Washington, DC 20549

Dear Chairman Cox:

I understand that the Securities and Exchange Commission (SEC) is investigating whether Citigroup and other financial institutions misled investors regarding the safety and liquidity of auction-rate securities. If the SEC determines that monies should be paid by Citigroup or other financial institutions as a result of these allegations, the SEC should consider the potential tax deductibility of these payments by Citigroup or other financial institutions when determining the appropriate amount of such payments.

For example, if the SEC decides that Citigroup should pay $600 million in connection with Citigroup's representations regarding auction-rate securities, Citigroup may be allowed to deduct this $600 million payment from its taxable income, resulting in a tax benefit to Citigroup of $210 million, which is equal to the $600 million payment multiplied by the corporate tax rate of 35 percent. To prevent Citigroup from receiving this potential tax windfall at the expense of American taxpayers, the SEC should consider "grossing-up" the payment by Citigroup to an amount of $923 million. This way, Citigroup may be able to deduct the $923 million payment at the 35 percent corporate tax rate, which is worth $323 million in tax benefits to Citigroup, resulting in an after-tax payment of $600 million (the $923 million net payment minus the $323 million in tax benefits received by Citigroup). Therefore, the after-tax amount of $600 million would actually be paid by Citigroup, rather than a large portion of this amount being paid by American taxpayers.

As you know, the issue of the tax deductibility of certain payments by financial institutions arose in 2003 in connection with a $1.4 billion global settlement between the SEC and ten financial institutions regarding allegations that these institutions misled investors to attract business from corporations to underwrite these corporations' securities. Yet again, Citigroup was involved, with Citigroup's Salomon Smith Barney owing the largest payment of $400 million.

On April 29, 2003, Chairman Baucus, myself, and Senator McCain introduced the Government Settlement Transparency Act of 2003 regarding any settlement with any level of government, state or federal, of a violation or potential violation of the law involving penalty payments. Generally, the bill made clear that payments made to acknowledge actual or potential violations of any law would not be tax-deductible.
The bill, if enacted, would have denied a deduction for any such payment, including those where there is no admission of guilt or liability and those made to avoid further investigation or litigation. Payments for real restitution to people that were harmed would have remained tax-deductible.

This common-sense revenue-raising legislation has not been enacted into law, due in part to opposition from financial institutions including Citigroup. As my colleagues on the other side of the aisle continue to insist on paying for tax relief such as the active-financing exception provision in the tax-extenders legislation by enacting other revenue-raising proposals, I will continue to attempt to enact such common-sense revenue-raising proposals as this one, which prohibits financial institutions from shifting the burden of its obligations to the American taxpayer. Until such a proposal becomes law, please consider grossing-up any payment amount by any financial institution in connection with auction-rate securities so that the after-tax amount of the payment reflects the amount that the SEC actually intends to be paid by the financial institution.

Sincerely,

Chuck Grassley
United States Senator
Ranking Member of the Committee on Finance


CC: Vikram S. Pandit
Chief Executive Officer
Citigroup Inc.

Robert Wolf
Chairman and Chief Executive Officer, Americas
UBS AG

Robert E. Rubin
Chairman of the Executive Committee
Citigroup Inc.

Jeffrey Levey
Vice President, Global Government Affairs
Citigroup Inc.

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