Judge Tells the SEC and Bank of America to Fight it out in Court
The New York Times recently reported that a Federal Judge rejected the proposed settlement between the SEC and Bank of America over the controversial bonuses paid out by the Bank. The settlement would have meant that the Bank paid a $33 million fine in exchange for neither admitting nor denying responsibility. Notably, Judge Jed Rakoff, United States District Judge for the Southern District of New York, unleashed a scathing attack on the SEC, saying, the settlement was a “contrivance designed to provide the SEC with the facade of enforcement.”
In acquiring Merrill Lynch, Bank of America had relied upon $45 billion in taxpayer funds, leaving open questions as to whether the American public was paying the fine. After the acquisition, Bank of America revealed that it had paid out $5.8 billion in bonuses to Merrill employees, despite assurances both to the government and to shareholders that it would not do so. Thus, the SEC alleged that the Bank seriously misled investors. In settling the matter, both the SEC and Bank of America had hoped to put the issue to bed. However, Judge Rakoff told both parties to prepare for a trial starting in February 2010, saying that the settlement “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.”
This ruling comes against a backdrop of President Obama’s speech to Wall Street, in which he urged bankers not to return to previous indulgences: “We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis.” At the heart of Rakoff’s rejection of the settlement is whether a bank can mislead investors and then use shareholder funds to pay a fine out of proportion to the original transgression. Such a settlement points to the ways of the past that Obama charged bankers to abandon. Using shareholders funds to pay the fine struck Rakoff as particularly offensive. “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,” Judge Rakoff wrote.
Despite the Judge’s scornful opinion, it remains unclear whether the SEC actually can prove its claims in court. David Rosenfeld, the SEC’s associate regional director in New York, said the Bank had relied on outside counsel to review the statements that the SEC alleges were misleading. The SEC might not be able to rely on such testimony in court, as it would be protected under attorney-client privilege.
Both Bank of America and the SEC said that they disagreed with the ruling. In a statement, the Bank said, “Bank of America believes the facts demonstrate that proper disclosure was made to shareholders about the Merrill bonuses.” Similarly, the SEC said, “We believe the proposed settlement properly balanced all of the relevant considerations. We will carefully review the court’s most recent order.”
