Securities Law Prof Blog

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

Monday, February 22, 2010

Judge Rakoff Approves Settlement, Calling it "Half-Baked Justice at Best"

"While shaking its head," the Court (i.e., Judge Rakoff) approved the proposed consent judgment between the SEC and Bank of America settling the two enforcement actions, one of which was scheduled to begin trial on March 1.  Finding that the settlement was "half-baked justice at best," nevertheless the judge felt constrained by the law's requiring the court to give substantial deference to the SEC as the regulatory agency having principal responsibility for policing the securities markets.  Even more weighty in his view were considerations of judicial restraint:

We can balk when a bank tries to escape the implications of hiding material information from its shareholders, and we can protest when the regulatory agency in charge of deterring such misconduct seems content with modest and misdirected sanctions; be, in the words of a great former Justice of the Supreme Court, Harlan Fiske Stone, "the only check upon our own exercise of power is our own sense of self-restraint."

The opinion (Download SEC V BOA) is well worth reading in its entirety, but here are some specifics:

It is clear to the court that the BofA proxy statement failed adequately to disclose the Bank's agreement to let Merrill pay $5.8 billion in bonuses and also failed adequately to disclose the Bank's ever-increasing knowledge that Merrill was suffering historically great losses during the fourth quarter.

It is also obvious to the court that these failures to disclose were material.

What is not obvious is whether these material nondisclosures resulted from negligence or from more culpable conduct.  Because the New York AG's complaint alleges the latter, the court was obliged to review deposition testimony provided by the AG  to determine if the SEC's conclusions were unreasonable.  Specifically, the court reviewed the testimony concerning the termination of BofA GC Mayopoulos' employment.  While the SEC and the Bank assert his firing was done to move current CEO Brian Moynihan into the position, the New York AG alleges Mayopoulos was fired because he was pressing for more disclosure.  The court, after its review, concludes that "none of the evidence directly contradicts the Bank's assertion that Mayopoulos' termination was unrelated to the nondisclosures or to his increasing knowlege of Merrill's losses."  The judge, however, makes it clear that he is not making any determination as to which of the two competing versions of the events is the correct one.

As to the prophylactic measures designed to prevent nondisclosures in the future, the court finds that the remedial steps "should help foster a healthier attitude of 'when in doubt, disclose."

As to the $150 million penalty, the court continues to find it problematic.  The amount is very modest, indeed "paltry."  A bigger problem, and one that the judge emphasized in his disapproval of the first proposed settlement, is that payment of the penalty by the corporation means that innocent shareholders bear the loss caused by the managers, rather than those managers themselves.  Because the distribution will be structured so that former Merrill shareholders who are now BofA shareholders will not receive a distribution, the effect serves as a renegotiation of the price paid to Merrill shareholders by the BofA shareholders.  But the effect is "very modest."

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