Corporate Governance

SEC v. BofA: Judge Rakoff Rejects the Settlement (Part 4)

By J. Robert Brown

Judge Rakoff's second concern was the explanation for the settlement provided by the Bank.  The Bank adopted a somewhat belligerent tone, loudly proclaiming its complete innocence ('vigorously' asserting innocence in the language of the opinion).  The court didn't seem convinced.  In a disbelieving tone, the Judge noted the contention made by the SEC that 'executives at the Bank expressly approved Merrill's making year-end bonuses before they issued the proxy statement denying such approval'.  

More pointedly, the profession of innocence put the Bank into a tough position of justifying a $33 million payment where there was no wrongdoing.  The Bank explained the decision as merely a matter of business judgment.  As Judge Rakoff characterized:  'Because of the SEC's decision to bring charges, Bank of America would have to spend corporate funds whether or not it settled.'   

It was clear that he doubted the explanation.  '[I]t is difficult to believe that litigating this simple case would cost anything like $33 million.'  Nonetheless, he mostly relied on what he viewed as a flawed decision making process. 

• it does not appear, so far as one can tell from this single sentence in a footnote, that this decision was made by disinterested parties. It is one thing for management to exercise its business judgment to determine how much of its shareholders money should be used to settle a case brought by former shareholders or third parties. It is quite something else for the very management that is accused of having lied to its shareholders to determine how much of those victims' money should be used to make the case against the management go away. And even if this decision is arguably within their purview, it calls for greater scrutiny by the Court than would otherwise be the case.

Nonetheless, the Bank having professed innocence, the Judge concluded that he could not approve the settlement.  '[S]ince the Bank contends that it never made any false or misleading statements in the past, the Court at this point lacks a factual predicate for imposing such relief.'

Bank of America could easily have defended the settlement by noting the uncertainty of the outcome and, while professing the belief that it would ultimately prevail, had opted to settle rather than go through the litigation process.  Judge Rakoff would probably have been unhappy with that contention but would have had far less maneuvering room.  The matter would have been a quintessential matter within the board's decision and courts are loathe to interfere with these types of specific business decisions. 

We have a number of primary materials, including this opinion, posted on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on September 15, 2009 (boomark / email).