Legal News

But Will Judge Rakoff Approve This BofA/SEC Deal?

By Ashby Jones

The question posed in our headline has to be at the forefront of the minds of folks at the SEC as well as executives and lawyers at Bank of America.

On its face, the settlement certainly looks “better.” The earlier settlement that hit the Rakoff Roadblock provided for a $33 million payment made by BofA to the SEC. This one provides for a much stiffer fine — some $150 million. The thinking might go like this: Rakoff was angry at BofA, and the earlier settlement didn’t do enough to punish the bank. This is a stiffer penalty, so Rakoff might be happier.

But let’s dig a little deeper. Rakoff’s initial objection to the settlement didn’t have all that much to do the amount of money in the settlement. As a matter of fact, he wondered if it was right to punish BofA shareholders for alleged misdoings at the company’s top. He wrote:

It is not fair, first and foremost, because it does not comport with the most elementary notions of justice and morality, in that it proposes that the shareholders who were the victims of the Bank's alleged misconduct now pay the penalty for that misconduct. . . . [T]he notion that Bank of America shareholders, having been lied to blatantly in connection with the multi-billion-dollar purchase of a huge, nearly-bankrupt company, need to lose another $33 million of their money in order to "better assess the quality and performance of management" is absurd.

So what’s going on here? “Frankly, I just don’t understand the settlement,” says James Cox, a securities-law expert and professor at Duke Law School. “The money was never Rakoff’s issue. And now BofA is agreeing to pay even more? I’m just not sure it makes sense.”

After Rakoff rejected the settlement, he intimated that he wanted more accountability from BofA. “The judge's not-so-implicit message is that he wants people named and he wants those people to pay the penalties," said St. John’s professor Thomas Sabino to Bloomberg back in September. "The bottom line is that there have been very pertinent and important questions asked and the answers have not been very forthcoming."

Cox reads Thursday’s settlement as the “SEC implicitly affirming that they couldn't find any individuals responsible.” That, he adds, just doesn’t square at all with the lawsuit filed Thursday by Andrew Cuomo, in which Cuomo named individuals. “It’s a huge inconsistency."

And what about the other concessions made by BofA, prescribing changes to their corporate governance practices? They further confuse the issue for Cox. “Usually when you see those, you see the monetary value of a fine go down,” he says. “Those are often traded in for money.”

Concluded Cox: “Either I’m hopelessly ignorant, or this doesn’t address Rakoff’s concerns at all. Maybe they think Rakoff is getting senile in his old age. But I wouldn’t count on that.”

Full post as published by Law Blog - WSJ.com on February 04, 2010 (boomark / email).