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anigbrowl

- $5 million in fines, for

- 22 years of willful reporting violations

- using 13 shell companies

- to conceal ownership of a $32 billion portfolio

I'm sure they're gutted by this ~0.016% fine.

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For context, 0.016% of 22 years is 1.25 days. They got fined effectively 1.25 days out of 22 years of profit.

They did not make $32 billion in profit over 22 years.

Well, they almost certainly made more. The only number we have is how much they reinvested, after depreciation.

Why would the fine be higher? Presumably it's proportionate to the harm caused, not by the size of the fund.

It's actually a settlement, not a fine, which is probably pinned closer to the "This is the amount we think we'd have to pay lawyers to argue the case" value than the "This is how much we would owe if we were found guilty of breaking the law" value.

Right, either way, I'm looking for an intuition about how much an infraction like this should cost. Presumably, the settlement also includes the LDS church's consent to start filing reliable 13F's.

I'm not saying I think 5MM is the right number; I'm just saying I have no intuition for what the number should be, and the rationale I see on the thread seems to be "they're big". If I get pulled over in a Bentley with an expired sticker, I pay the same price as someone in a Kia.

Not in Sweden tho, traffic tickets are proportional to income.

If you keep getting tickets in the US, you'll eventually get your license suspended.

Many countries have it: https://en.wikipedia.org/wiki/Day-fine

For personal tax returns the typical penalty is 20% of the underpayment + interest.

> If I get pulled over in a Bentley with an expired sticker, I pay the same price as someone in a Kia.

That meets an intuitive definition of fairness, but the realpolitik story there is you don't have a lot of power to make trouble for the municipality by tying them up in court for a half-decade arguing how your Bentley was actually operated legally because the definitions of "sticker" and "driving" and "expired" are very flexible (on account of them being not very flexible).

The probability a case heads towards settlement hinges on the ambiguity of the charges and the plaintiff's ability to prove said charges. Securities is way murkier than traffic operation.

Yeah, that didn't happen. The SEC brought this enforcement action in 2019.

Yeah, the SEC arranged a settlement so they wouldn't spend a decade in court.

If the fine is less than the profit of committing the crime, then it is now de facto legal, taxed profit. There is no incentive not to continue committing the crime.

Perhaps $5mm is a valid fine on top of repaying the illegal profits. But on its own? It is an endorsement.

I don't know if they made additional profits from this. I think they hid their holdings to prevent bad press for the LDS church. Not to give them a market advantage. This appears to me to be a slap on the wrist saying "don't do that".

Fair enough, if they in fact didn't gain any money from their illegal actions then the fine is less problematic.

> If I get pulled over in a Bentley with an expired sticker, I pay the same price as someone in a Kia.

The fine should scale with the size of the infraction. If you sticker expires on your car, the infraction is the same severity, no matter the car [0]. ~Hiding a few million vs. hiding a few billion in taxes is a whole different level.~ EDIT: They just hid it for information purposes. Not to avoid tax. Therefore, this does not apply in this case.

Also, the fine is intended to discourage the behavior. If the money obtained by breaking the law minus the fee is still positive, there's no incentive to stop breaking the law. $5MM on a fund worth a few billion is very likely to be well within the still profitable area.

[0] I'm not sure about the US, but at least in Germany, an expired sticker actually is a larger infraction for commercial vehicles, especially if you transport people. So even there it's correctly scaling with severity.

Right, I agree. But they didn't hide millions from taxes. They availed themselves of more privacy than the SEC allows for fund managers. If we can articulate the manner in which that inflicted more than 5MM in harm, I think we have a strong case for the fine being too low. But I have no intuition for how to work out the harm these bad filings caused. Do you?

As for deterrence: it appears as if the SEC successfully deterred Ensign Peak from doing this, right? They hadn't filed properly since 1997, but the enforcement action is just a couple years old.

You're right, I was missing that they were just hiding the funds for information purposes, not tax purposes. In that case the fine is probably more appropriate.

Filing a 13F is essentially a tax upon all market participants, it provides zero benefit to the public. Filing has a financial cost. If the SEC settlement were less than the cost of filing over multiple years, then all rational actors would stop paying to file 13-Fs and simply pay off the SEC every couple years. The middlemen and the pretend regulators both benefit from busywork continuing, so the fee is slightly more than the cost of filing 13-Fs to encourage cooperation.

There's probably a joke in there somewhere about the 13-F process being "securities theater" as compared to the better known IT "security theater" phrase. 13-F is a classic example of "regulation can sometimes be wasteful and inconvenient" therefore anything wasteful or inconvenient can be hand waved away by appeals to "regulation" much like the classic analogy with computer security. See also security theater at airports, plenty of the governmental covid responses, etc.

If the punishment changes based on who you are that kind of shits all over the concept of justice being blind.

>Also, the fine is intended to discourage the behavior. If the money obtained by breaking the law minus the fee is still positive

The money saved not renewing your registration on time is roughly the same regardless of what you're driving so that would seem to favor the fixed fine.

In Finland, traffic fines scale based on your income.

> If I get pulled over in a Bentley with an expired sticker, I pay the same price as someone in a Kia.

Depends entirely on where you live. If you do the equivalent crime in Finland, you will be fined 6-14 "day fines". Each day fine is calculated to be (your_monthly_gross_income - 255€)/60, minimum of 6€ and unbound from above.

I believe that this system is much more just than flat fines. A fine is not payment for a service, it is a punishment. It should hurt as much whether you are poor or rich.

An expired sticker is not an SEC violation. SEC violations scale based on a number of factors.

https://corpgov.law.harvard.edu/2016/01/24/calculating-sec-c...

> If I get pulled over in a Bentley with an expired sticker, I pay the same price as someone in a Kia.

In the US, sure. The people advocating for a proportional fine in the LDS case presumably would argue for a proportional one in your example, too.

Switzerland actually DOES fine you more if you have the money and break the law. https://www.hotcars.com/heres-why-a-dude-in-sweden-received-...

Traffic fines are often considered regressive because a rich person can laugh at a few hundred dollars whereas a poor person suddenly can't afford rent.

So yeah, perhaps some fines should scale to ones means, otherwise it won't deter bad behavior.

More accurately: "This is the amount we think we'd have to pay lawyers to scuttle the case"

Not an expert on LDS but aren't there tons of lawyers that are members?

It should be proportionate to the size of the fund, because one of the reasons fines exist is for the deterrence effect. Ideally you want other potential perpetrators to think twice. Do you think this small fine has that effect?

Can you support with evidence the idea that Ensign Peak is just going to blow off the fine and pay 5MM every few years instead of filing 13Fs? Because if they start reliably filing 13Fs, they've refuted this argument.

If there's a distinctive harm that we can draw out from the LDS Church failure to file 13Fs, I'm all ears about scaling up the penalties accordingly. But otherwise, the logic we're using applies to literally any offense Ensign Peak could have committed, no matter how marginal. I guess I'd like to start by working out whether this particular offense was marginal, or material.

I feel like if BP got deleted by fines after one oil spill this argument would hold.

As it stands it appears companies treat fines the expected way: just cost of doing business.

Right, so if failing to file 25 years worth of correct 13Fs for subsidiaries is equivalent to a BP oil spill, I'll agree with you that the fine should be much higher. Is it?

The risk is not that Ensign Peak will keep doing this, it's that other people who are committing the same violation as we speak will now continue to do it until they're caught because they know there will be no noticeable penalty.

If it's easier to understand, just consider how much the SEC had to spend litigating this for 4 years. Now every time they come across this particular crime they'll have to spend at least that much, because the perpetrators will know there is no risk in fighting them, and nobody will preemptively stop before an investigation.

so what? the SEC can easily fuck around and get their entire charter invalidated by Congress or the court if they go after the wrong organization, nearly every creature of the New Deal got the same fate and the SEC operates right at the edge of its authority and constitutional rationality already.

and its not even clear if 13F filings are that important, aside from "its mandated by the SEC", Ensign Peak didn't challenge this, they got a tap on the shoulders after their lawyer's solution was questioned, and they changed their tactics. Leave it up to someone else to actually challenge it.

A tiny settlement is best. Its a joke, I agree with that, but it is also rational.

From their statement: https://newsroom.churchofjesuschrist.org/article/church-issu...

"In June 2019, the SEC first expressed concern about Ensign Peak’s reporting approach. Ensign Peak adjusted its approach and began filing a single aggregated report. Since that time, 13 quarterly reports have been filed in full accordance with SEC requirements."

> Can you support with evidence the idea that Ensign Peak is just going to blow off the fine and pay 5MM every few years instead of filing 13Fs?

The parent comment very clearly said “other perpetrators”.

I agree: Such a small fine is basically encouragement for other groups to commit the same violations. When the downsides are so negligible small, there is basically no risk for duplicating the bad behavior. If you get caught, pay a token fine and move on.

I understand. But if the offense is itself marginal, it doesn't make sense to inflict disproportionate punishment on one offender; the penalty still needs to bear some relationship to the offense! We don't, like, arrest Ferrari drivers for violating a no-turn-on-red sign so as to prevent other rich assholes from ignoring the sign. They get the same ticket everyone else does, and if they keep doing it, eventually we suspend their license.

A fine (or in this case settlement) has to be somewhat painful in order to deter. I remember a story about Steve Jobs never getting a license plate and always parking in spaces reserved for disabled people, and so on. He just ate the fines and continued the behavior because they were trivial to someone with his fortune.

If OP's numbers are correct, the fine in this case amounts to 0.015% of assets under management--far lower than what anyone would pay a money manager to manage their investments. I'm sure no other potential violator would feel it necessary to change their behavior if they knew their penalty was 0.015%.

These guys (at Ensign Peak) kept doing it for ~20 years, and when they were worried about discovery by third parties their response was not to clean up their act but to iterate upon it.

I don't understand why you are equating a single enforcement action with a single offense. We don't just suspect they did it more often, we know. And they knew that it was wrong. Settling for future compliance as sufficient just incentivizes others to lie in the future.

This is how things work in the world of big money. "I dare say, old chap, that was hardly sporting of you. Harumph, harumph. Well, I'll see you at the club on Tuesday."

It probably should be proportionate to both.

I should properly have called it a settlement rather than a fine, but anyway:

The issue for me here is the willfulness and scale of the deception. I'm not so surprised to discover that the Church has a ~$37 billion portfolio; I'm not sufficiently interested to pay close attention to them, but but it was apparent to any but the mot casual observer that the Church was a very wealthy entity. As a religious organization, it's benefits from tax exemption; it seems to me that part of the price for that special treatment is greater transparency - notwithstanding that this isn't a tax liability case.

BTW I'm referring to 'the Church' throughout as Ensign Peak is a wholly owned entity of the Church and no management fees change hands. Further, Ensign Peak wasn't authorized to file 13Fs on its own initiative (per the order); it effectively has zero independence of its parent. I'm not sure why they set it up so that Ensign Peak pays $4m to the SEC and the Church itself $1m, but I'm going to guess because it looks better that way in press coverage and on their next form 990 filing.

What I mean about willfulness and scale is that from the outset, these shell companies were created to conceal the fact of the Church's portfolio from the public, other investors, and to a large extent their own membership. As detailed in the order, this concealment stretched over nearly 2 decades and eventually grew to encompass 13 shell companies, with new ones being set up when managers determined that business intelligence/the press were becoming aware of the arrangements. Indeed, when a public website figured out the network of reporting entities and made the facts public in 2018, 2 of the business managers of the shell companies (who were based in Salt Lake City, though the entities were registered in Delaware) resigned, expressing concern about what they had been asked to do. Rather than the network of shell companies being shut down, the troubled managers were just replaced, and the arrangement continued until the SEC got involved.

All told, this involved about 100 different acts of deception (in terms of the misleading 13f filings; I have no idea how many private or public statements might have ensued). So the settlement here works out at about $50,000 per false filing. I doubt that that did much more than cover the SEC's legal and administrative costs on the investigation and preparation for trial. The number and long timescale of the deceptions in my view demonstrates impunity; this wasn't a single negligent or reckless decision, but a long-running practice that only unravelled because third party observers connected the dots independently.

You wrote elsewhere in the thread about how we don't arrest a Ferrari driver who makes a right turn at a red light just to deter other rich assholes, while also commenting that if you serially break the traffic laws, eventually your license will get suspended. Well, they serially broke the reporting laws, and every time outside observers or some of their own staff called foul, they escalated rather than abandoned their deceptive practices.

It seems, by the way, that this might be the tip of a larger iceberg. Two former Ensign Peak managers (who may be the ones who resigned previously) have alleged that the Church has around $100 billion in assets and and has violated its nonprofit status by not distributing any of it, but instead holding it in reserve for the 'second coming of Christ'. The link below includes a recent filing with the US Senate Finance Committee.

https://religionunplugged.com/news/2023/2/8/former-employee-...

The SEC is, largely, a powerless bogeyman due to chronic underfunding and lack of staff. Another wonderful feature of corporate regulatory capture in the US.

So you need more staff to write down a larger fine on a piece of paper?

You need the staff to enforce it...

fine = scale of crime x (number of ppl working at SEC/1000000)

…yes? Because with larger fines comes larger court cases - and larger numbers of support staff.

Corporations have lobbied and purchased their way into these freedoms at the cost of our wallets and futures.

Don’t play thick. I too wish these assholes got prison time for this behavior.

How many bureaucrats does it take to type a zero on a fine?

In all seriousness, I'm a dyed-in-the-wool capitalist and I love the SEC.

But what kind of staff or funding does it take to say literally different words out of your mouth like, you are fined $5B instead of $5MM? I can do that for free, especially if they are already at the point where they are making the charge. Every fine should be devastating so that they either barely survive or die, and every other company shits themselves for life and we solve the problem.

Hence the phrase "regulatory capture" which describes a system in which unelected bureaucrats are not given life-and-death power over companies, but the people who set the rules are wholly captured by the regulated companies so the rules are made weak.

Thanks for the definition

>But what kind of staff or funding does it take to say literally different words out of your mouth like, you are fined $5B instead of $5MM?

Because we don't live in an autocracy, and government fines can (and are) successfully challenged in court. It takes an immensely greater effort, and immensely greater resources, to enforce a $5B fine vs a $5M fine.

How do you get away with defending tax fraud to the point where the fine is pointless? Does the SEC not get to keep the winnings to use for their future cases so they can hire a ton of lawyers? I guess the real problem is why are judges (presumably everywhere?) lettings companies and organizations get away with this or is there a specific set of judges that only handle SEC cases? Perhaps the first step to getting bigger fines is to just keep increasing fines across the board? Do they need to campaign to judges to remind them that financial crime is bad? How hard is it for anyone to understand that a fine is meaningless unless it hurts, no matter how big the number is? Do you really need more lawyers to prove that basic point? I guess you guys are stuck in a pretty crappy system, but then again I'm sure most places are :/

The piece you are missing is that the $5M figure is not what the SEC "decided," because this was a mutually-agreed settlement, not an SEC-dictated fine. A low figure is not a sign that the SEC is asleep at the wheel so much as a signal of their confidence about taking it to trial.

The lawyers to back it up. Fines and judgements are subject to judicial review.

I guess it just seems strange that if their job is to essentially take wrong-doers to court and win loads of money, even if those winnings are relatively small compared to what they should be, they would still both have a lot of lawyers on staff and a lot of money coming in (regardless of funding from the government) to pay for those lawyers and the more they fine, the more money they'd have to hire more lawyers? And they have no shortage of cases with no competitors? I get they are probably bogged down in infinite politically and bureaucratic BS, but still, seems like they should have an easy path to winning without asking for funding from anyone.

Its a settlement, so its based on the church's assessment of the strength and resources of the SEC

I feel worse for the whistleblower that probably reported that

They thought they were going to get a much bigger payday by reporting the malfeasance of a 32 billion portfolio

You can check on the SEC homepage if their is a corresponding whistleblower award. Could be as high as 1.5 million, which is not nothing but still less than one would have assumed.

I would guess that the whistleblower was employed by the church directly or via a subsidiary. Knowing many people who work for the Mormon church, it is likely the whistleblower lost their job and their pension.

You will lose your job and pension if you stop regularly attending church services or giving 10% of your paycheck back to the church ('tithing'). I can't imagine they don't take a harder approach to this. To be clear, it is wrong to retaliate against whistleblowers, but large organizations get away with it a lot.

I've been around the Church for a long time (and interacted a very little bit with senior leaders), and was a Church employee before health issues ended that. I very highly doubt that anyone "will lose your ... pension if you stop regularly attending church services or giving 10% of your paycheck back to the church".

But job, yes. They want people who are devoted, if they are going to pay them to further the work. To me that makes perfect sense.

(Thoughtful comments appreciated with downvotes; thanks.)

They "want people who are devoted" to helping skirt financial reporting laws?

you can whistleblow anonymously to the SEC

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