Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Tuesday, September 15, 2009

Second Thoughts on Judge Rakoff's Rejection of the SEC-BofA Settlement

I continue to ponder Judge Rakoff's order refusing to approve the SEC-BofA consent judgment in connection with the alleged misstatements about the Merrill bonuses in the BofA proxy statement seeking approval of the merger.  The judge acknowledges the deferential standard for reviewing consent judgments, but nevertheless finds this one is "neither fair, nor reasonable, nor adequate." Is the judge introducing a new standard for reviewing SEC consent judgments, or will this activism be confined to the particular facts of this case?

What really upsets the judge is that the corporation is paying $33 million in a penalty, but no chages were brought, or penalties sought, from the individuals responsible for the alleged misstatements.  To the judge, this is victimizing innocent shareholders plain and simple.  He rejects as "making no sense" the SEC's argument that a corporate penalty sends a strong signal to shareholders that corporate wrongdoing has taken place; implicitly, the SEC says that the shareholders should  exercise responsibility for the quality of management.  Yet corporate penalties are commonplace; does the judge mean to curtail their use, or does his sense of injustice result from the combination of a corporate penalty and the lack of individual sanctions?

The judge also finds the injunctive relief forbidding the Bank from issuing false or misleading statements in the future "too nebulous" to comply with the applicable Rule of Civil Procedure that requires describing in "reasonable detail" the restrained acts, particularly since the Bank is now asserting that it made no false or misleading material statements.  Yet these kinds of broad injunctions have been standard practice, as is the practice of the defendants neither admitting or denying the allegations.  Is the judge expecting a change in SEC practice?

Finally, the judge states that $33 million is a "trivial penalty" for a false statement that materially infected a multi-billion-dollar merger.  (Although he also wonders why the Bank is paying so much money if the charges are, as it claims, bogus.)  It's only post-SOX that the SEC began seeking penalties in excess of $10 million, and that resulted in a great deal of consternation on the part of the business community.

Again, we have to wait and see whether there is now a more heightened standard for reviewing consent judgments, or whether this is sui generis and reflects the judge's deep distaste for what he describes as the "cynical relationship" between the SEC and the Bank -- the SEC gets to claim a victory, and the Bank got the case to go away.  This is not the first time this kind of deal has been struck; what will happen if the game is curtailed.

Will this case now go to trial?  And what will the New York AG do?  That office is also threatening to bring action against the Bank.

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