When Companies Agree To Huge Penalties But Don't Admit Doing Anything Wrong : Planet Money Companies have a powerful incentive to avoid admitting wrongdoing. But some powerful people are pushing back.

When Companies Agree To Huge Penalties But Don't Admit Doing Anything Wrong

It happens all the time: The government announces some giant settlement with a company that's been accused of doing something wrong. The company agrees to pay some massive fine. Then, in the fine print, there's something along the lines of: "The company neither admits nor denies any wrongdoing."

Recently, though, some powerful people have been pushing back, rejecting deals that include this kind of fine print.

Jed Rakoff, a federal judge, refused to approve a big settlement between the SEC and Citigroup precisely because it included that boilerplate about neither admitting nor denying guilt.

A gavel in a courtroom.
Francis Twitty/ iStockPhoto.com

In his decision (PDF), Judge Rakoff wrote that he couldn't approve a settlement when no one had proved or admitted that Citi did anything wrong. What's more, Rakoff aruged, the whole neither-admit-nor-deny thing is contrary to the public interest:

...in any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives there is an overriding public interest in knowing the truth.

Rakoff's decision may be overturned, but last month the SEC restricted companies' ability to refuse to admit wrongdoing, at least in certain cases.

And this week's government lawsuit against Standard & Poor's was filed in part because S&P refused to admit wrongdoing, according to the NYT. The government says S&P knowingly inflated the ratings of mortgage-backed bonds; the company says the accusations are false.

No surprise there: If S&P were to admit that it knowingly inflated bond ratings, it could face a huge wave of lawsuits.

"If you say, 'Oh, we're guilty,' then everybody in the world who ever bought a bond that was rated could come after you," Lawrence Kaplan, a lawyer who's an expert in banking regulation, told me this morning.

Going to trial and being found guilty would actually create fewer legal problems for S&P. Unlike admitting wrongdoing, losing a trial is only binding in that particular case, Kaplan said. Other would-be plaintiffs would have to try the case all over again, before a new jury, which might find in favor of the company.

So if federal prosecutors really are getting serious about forcing companies to choose between admitting wrongdoing and going to trial, we're likely to see more cases go to court — and fewer big settlements where companies agree to pay lots of money but don't admit they did anything wrong.