Academic

What happens when: (a) a state attorney general charges that the officers of a financial institution are garden variety fraudsters, while (b) a federal agency whose avowed purpose is to protect the investing public decides that insufficient evidence exists to prove that said officers violated the law, but that their company (ie their shareholders) ought to pay the federal government a $150 million dollar fine anyway?  Well for one thing, the federal judge overseeing the federal agency?s settlement might get a little ? peeved.

On Monday, the SEC went back to Judge Rakoff to justify its (now) proposed $150 million settlement with Bank of America.  The fine represents BOA?s penalty for failing to disclose the extent of Merrill Lynch?s losses to BOA?s shareholders prior to voting on BOA?s merger with ML.  Rakoff had previously queried why he should approve a (then $33 million) settlement that effectively requires BOA's current shareholders to pay a fine, but leaves BOA?s officers in the clear.  It seems the SEC decided to go back to the drawing board and ? make BOA?s shareholders pay out even more money.  According to the New York Times, however, Judge Rakoff responded that he would prefer to see an even higher fine of $300 or $600 million, while Bloomberg's account noted that Rakoff was unhappy about the circularity of the fine (which has been well explored in the securities fraud literature).

No doubt, BOA?s current shareholders are feeling very loved right now. 

Don?t worry, Rakoff isn?t forgetting the officers.  He also wants to put in place corporate governance reforms (perhaps a redo of Richard Breeden?s Worldcom monitorship?), and like everyone else, is very interested in executive compensation reform.  In fact, he reportedly would like to have a role in choosing BOA's executive compensation consultant.   He?ll make his final decision by February 19^th.

Ultimately, this just leaves me confused.  Either the SEC is captured and the AG?s office is taking on the enforcement role that the feds have effectively abandoned, or the SEC is exercising appropriate restraint and the AG?s office is pandering to the public?s desire to punish executives.  This may be one of those situations where a public trial would help us discern the difference between these two competing narratives.  I therefore find myself in the odd position of cheering the BOA officers on, not so much because I am sure they did nothing wrong, but because I see no other way of judging the actions of the SEC and the AG.  In sum, a trial might be salutary not so much because of what it would tell us about the private actors, but rather because it would allow us to better understand the motivations and conduct of public actors.