Legal Commentary

Judge Jed Rakoff (SDNY) rejected the settlement proposed by the SEC and the Bank of America for allegations that the Bank of America lied to shareholders during its merger with Merrill Lynch.  Specifically, the SEC claimed that Bank of America falsely told shareholders that Merrill would not be permitted to pay its executives year-end bonuses when, in fact, BoA had given Merrill approval to pay up to $5.8 billion in bonuses.  Here is the key graf:

In other words, the parties were proposing that the management of Bank of America -- having allegedly hidden from the Bank's shareholders that as much as $5.8 billion of their money would be given as bonuses to the executives of Merrill who had driven the company nearly into bankruptcy -- would now settle the legal consequences of their lying by paying the S.E.C. $33 million more of their shareholders' money.

This could be characterized as a Howard Beale moment for Judge Rakoff -- a cri de couer against the system.  After all, his criticism could be leveled against every SEC settlement in which a corporation (opposed to individuals) pays the fine.  Seasoned observer David Zaring reacts with outrage of his own against officious judicial meddling.  But instead of viewing this as grandstanding or obstreperousness, I think it's a useful opportunity to reconsider the basics of securities regulation.  After all, it does seem somewhat absurd to have the "victims of the violation pay an additional penalty for their own victimization."  Perhaps Judge Rakoff's opinion will prompt a reexamination of this basic facet of the system.

Judge Rakoff's opinion is a brief but wide-ranging discussion of executive compensation, corporate wrongdoing, the TARP bailout (see n.1), and the role of the SEC.  Judge Rakoff wants individual accountability, and he thinks the settlement is an effort to evade it.  It remains to be seen whether this is merely an interesting blip or a catalyst for further action.  But I hope it's more than merely some extra work for the SEC.