Legal News

In BofA, SEC Case, What Happens Now?

By Ashby Jones

Manhattan federal judge Jed Rakoff excoriated the SEC and Bank of America in his opinion issued Monday, in which he refused to sign off on the parties’ proposed $33 million settlement. That, for us media types, was a lot of fun.

But what happens now?

On paper, it’s rather straightforward: the SEC will take its charges against BofA to trial, slated for Feb. 1 of next years.

But it’s all a bit awkward now, no? For starters, it’s sort of hard to believe that the SEC and BofA can, after thinking they’d kissed and made up, start fighting again, just like that.

Indeed, the SEC has few options — and none of them are all that good, says Wayne State’s Peter Henning, to Bloomberg. The SEC could try the case. But that’s risky: what if the bank actually has strong defenses? It could file a new lawsuit against individual executives or lawyers. But that too is dicey. The SEC has already said it lacked sufficient evidence to do so. Of course, the SEC could dismiss the case altogether — and decide simply to endure the public outcry that would likely follow.

"In a sense, the SEC has painted itself into a corner," said Henning to Bloomberg.

Tamar Frankel, a professor at Boston University School of Law, told Bloomberg that a settlement with different terms may eventually be acceptable to Rakoff. One possibility is that Bank of America could agree to recover all or part of the bonuses paid Merrill Lynch executives, she said.

But to Anthony Sabino, a business-law professor at St. John's University in New York, it seems clear that Rakoff wants BofA, or its executives, to pay a steeper price. "The judge's not-so-implicit message is that he wants people named and he wants those people to pay the penalties," "The bottom line is that there have been very pertinent and important questions asked and the answers have not been very forthcoming."

Interestingly, in the NYT article out Tuesday, some questioned the wisdom of going forward with the case at all. Writes the Times’s Zachery Kouwe:

Some analysts argued the case itself was irrelevant given that Bank of America's takeover of Merrill had increased the bank's profits, resulting in a surge in its stock price.

The deal also saved Merrill from impending collapse and arguably prevented a greater financial calamity from unfolding in the immediate aftermath of the Lehman Brothers bankruptcy.

"I'm having a difficult time understanding who was harmed here," said Richard X. Bove, a banking analyst with Rochdale Securities. "Why is this company being put into court over a series of events that benefited the nation, its economy, its financial system, the shareholders of Bank of America and the bank itself."

Full post as published by Law Blog - WSJ.com on September 15, 2009 (boomark / email).