Oversight Done Right: Judge Rakoff Rejects SEC-BofA Settlement

Have you ever felt helpless as Wall Street Masters of the Universe seem to get rewarded and re-rewarded for running their businesses into the ground? Have you shaken your head in disbelief as the government seemed unwilling or unable to take them to task? Have you wondered if you were the last person left with common sense or a concept of basic fairness? Well, my friends, you are not alone.

Today U.S. District Court Judge Jed Rakoff showed how financial regulation OUGHT to be done; with fairness, common sense and real logic instead of tortured pretzel logic.

Some background: When Bank of America bought Merrill Lynch, B of A told its shareholders that it would not be paying bonuses to Merrill’s executives. You know, the guys who had run Merrill into the ground?

That was not actually the truth. B of A allowed bonus payments to Merrill execs totaling. . . wait for it. . . $5.8Billion, or 12% of the total purchase price. That’s a lot of moolah, both in absolute terms, and in terms of the percentage of the value of the deal.

The SEC found out about the lie to shareholders and brought a case against B of A. They agreed to settle for $33 million and brought the settlement to Judge Rakoff for his approval.

Judge Rakoff has refused to approve the settlement.

[T]he parties were proposing that the management of bank of America – having allegedly hidden from the Bank’s shareholders that as much as $5.8 billion of their money would be given in bonuses to the executives of Merrill who had run that company nearly into bankruptcy – would now settle the legal consequences of this lying by paying to the S.E.C. $33 million more of the their shareholder’s money.

This proposal to have the victims of the violation pay an additional penalty for their own victimization was enough to give the court pause.

Then Judge Rakoff starts talking like a regular person. . . about fairness:

It is not fair, first and foremost, because it does not comport with the most elementary notion 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.

Then, he calls a spade a spade:

Overall, indeed, the parties submissions, when carefully read, leave the distinct impression that the proposed Consent Judgment was a contrivance designed to provide the S.E.C. with the fa├žade of enforcement and the management of the Bank with a quick resolution to an embarrassing inquiry…"

[emphasis added]

Really, you must read the entire decision, 13 scathing pages calling out both the S.E.C. and B of A. It is a work of beauty, and a joy to finally see someone speaking plainly.

Comments are closed.