Legal News

Let?s Go to Trial: Rakoff Slams BofA, SEC, Rejects Pact

By Ashby Jones

This just in: Manhattan federal judge Jed Rakoff has rejected the proposed $33 million settlement between the Bank of America and the SEC. The SEC had alleged that BofA “materially lied” in shareholder communications last year about bonuses to Merrill Lynch employees. Click here for the early WSJ story; here for Rakoff’s ruling; here, here, here, here, and here for earlier LB posts.

The SEC and Bank of America had sought the judge’s approval of a consent decree to resolve charges that the bank concealed an agreement to pay up to $5.8 billion in bonuses to Merrill executives. But, in an unusual move, the judge said no. On Monday, he set a Feb. 1 trial date on the allegations in his New York courtroom.

For starters, Rakoff found the proposed settlement unfair:

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.

Rakoff also questions why, while maintaining its innocence, BofA is agreeing to pay $33 million to settle. He says:

If the Bank is innocent of lying to its shareholders, why is it prepared to pay $33 million of its shareholders' money as a penalty for lying to them? All the Bank offers in response to this obvious question is the statement in the last footnote of its Reply Memorandum that "Because of the SEC's decision to bring charges, Bank of America would have to spend corporate funds whether or not it settled" . . . – the implication being the payment was simply an exercise of business judgment as which alternative would cost more: litigating or settling. . . .

But, quite aside from the fact that it is difficult to believe that litigating this simple case would cost anything like $33 million, it does not appear, so far as one can tell from this single sentence in a footnote, that this decision was made by disinterested parties. It is one thing for management to
exercise its business judgment to determine how much of its shareholders money should be used to settle a case brought by former shareholders or third parties. It is quite something else
for the very management that is accused of having lied to its shareholders to determine how much of those victims' money should be used to make the case against the management go away.

Lastly, Rakoff, a Swarthmore College English major, makes reference to a great Irish wit before finishing, with a flourish:

Oscar Wilde once famously said that a cynic is someone "who knows the price of everything and the value of nothing." Oscar Wilde, Lady Windermere's Fan (1892). The proposed Consent Judgment in this case suggests a rather cynical relationship between the parties: 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; the Bank's management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but also of the truth.

Full post as published by Law Blog - WSJ.com on September 14, 2009 (boomark / email).