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The Judge, The Shareholders & Cynical Regulators

Almost one year to the day since the collapse of Lehman Brothers, US federal Judge Jed Rakoff stepped up to protect the interests of shareholders in the on-going battle between owners and regulators. In a scathing judgement, Rakoff has rejected the $33 million settlement between Bank of America and the SEC which aimed to settle allegations that by failing to disclose bonuses owed to Merrill employees, BofA had “materially lied” in shareholder communications prior to its takeover of Merrill Lynch.

In a no holds barred judgement, Rakoff tears various strips off the SEC for setting aside its guidelines to  penalize shareholder at the expense of  the individuals who allegedly acted improperly. 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.” He also slammed as “absurd” the SEC’s argument that shareholder punishment will result in better management. As for the SEC’s defence that it would be too difficult to pursue BoA’s executives (because of their extensive and expensive legal representation) he asked: “If that is the case, why are the penalties not then sought from the lawyers? And why, in any event, does that justify imposing penalties on the victims of the lie, shareholders?”

BoA was not immune from the Judge’s pen. BofA has recently filed court papers defending its proxy statement claiming that it was neither false nor misleading. Judge Rakoff therefore aksed the question: “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?” It is not unusual for companies to settle out of court with the SEC on regulatory infractions. As the Judge noted, the decision not to pursue the allegations in court could well have been “made even easier” for BofA in light of the fact that “the U.S. Government provided [it] with a $40 billion or so ‘bailout.'” What was a “mere $33 million . . . to get rid of a lawsuit?”

And with a comment that will resonate with many shareholders, the judgement “suggests a rather cynical relationship between the parties: the SEC 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 of this is done at the expense, not only of the shareholders, but also of the truth.”

The case is SEC v. Bank of America Corp, U.S. District Court, Southern District of New York (Manhattan), No. 09-6829 and goes to trial in February 2010.


US District Court, Southern District of New York >>

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