Corporate Governance

The SEC's Latest Blunder

By Tamar Weinrib

The SEC alleged earlier this year that BofA had "materially lied" in shareholder communications prior to its takeover of Merrill Lynch, by failing to disclose bonuses owed to Merrill employees.  So how does one properly punish the wrongdoer?  By further victimizing the victims of course!  In a remarkably deplorable attempt at rectifying BofA's breach of securities laws, the SEC's staff negotiated a settlement under which Bank of America paid a $33 million civil penalty, and no officer or employee paid anything or was otherwise disciplined.  In other words, the shareholders continue to lose.

In a departure from the usual process of rubberstamping SEC settlements, as reported by John C. Coffee Jr. in a recent New York Law Journal article, Judge Rakoff issued a scathing opinion which detailed a "cynical relationship between the parties" under which "the S.E.C. gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger . . . [while] the Bank's management gets to claim that they have been coerced into an onerous settlement by overzealous regulators." Such a settlement, Judge Rakoff wrote, came not only at the expense of shareholders, "but also of the truth."

Especially vexing is that the SEC's actions in proposing such a settlement were in direct contravention to its own stated rule that, "Where the shareholders have been victimized by the violative conduct, or by the resulting negative effect on the entity following its discovery, the Commission is expected to seek penalties from culpable individual offenders acting for a corporation."  The logic behind this policy is to punish the wrongdoers while protecting the shareholders from further injury.  Did the SEC forget its own rule or decide to ignore it?  In a feeble attempt at justifying its decision not pursue the individual wrongdoers at BofA, the SEC claimed that it could not charge the BofA officers because "key executives all stated that they delegated these decisions to counsel, who were aware of the relevant business terms of the transaction."  The SEC never verified if this was in fact the case.  In other words, the executives might have relied on counsel. Which of course begs the question: why didn't the SEC pursue the attorneys?  With such defective logic, one can hardly wonder at the SEC's deplorable failure to detect Bernard Madoff's Ponzi scheme, arguably the largest fraud in history.

The burning question now is how the SEC will proceed.  They can try to re-negotiate a new settlement or go to trial as Judge Rakoff ordered.  Appealing Judge Rakoff's decision would be akin to pressing instant replay on the SEC's embarrassing fumble. 

To view this is as an isolated error on the part of the SEC is to lose the forest for the trees.  As the blunders start to add up, especially on the large scale of Madoff and Bank of America, the SEC needs to re-evaluate its methods of investigation and enforcement. 

Full post as published by PomTalk on September 21, 2009 (boomark / email).