Securities Law Prof Blog

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

Thursday, February 4, 2010

What Will Judge Rakoff Think?

Of course, like so many others, I'm wondering what Judge Rakoff will think of the proposed settlement between the SEC and Bank of America, which would settle both of the SEC's enforcement actions against BofA stemming from the alleged deficiencies in the proxy statement -- the failure to disclose the Merrill bonuses (the first action which the previous settlement attempted to settle) and the failure to disclose Merrill's worsening condition.  The latter charges are the primary focus of the New York AG's suit also filed today, which, unlike the SEC's actions, does name individual defendants, the former CEO Kenneth Lewis and former CFO Joseph Price.

Judge Rakoff's principal objections seemed to stem from (1) his frustration at not being able to get to the bottom of the matter and learn what really happened and who made the critical decisions.  In addition, he was critical that the action (2) did not name any indidivual defendants and that (3) the $33 million penalty would only be paid by the corporate defendant.  Thus, the very people harmed by the alleged wrongdoing -- the shareholders misled in casting their vote for the merger -- would also be harmed by the payment of the penalty from the corporate treasury.

The SEC attempts to deal with (1) by attaching a detailed Statement of Facts which BofA acknowledges as the evidentiary basis for the settlement, and (3) by providing that the $150 million penalty will be distributed solely to BofA shareholders harmed by the nondisclosure.  As noted above, however, the SEC continues (2) not to name individuals, despite the fact that the New York AG apparently found enough evidence to draft a complaint that sets forth a narrative of intentional deception committed by the former CEO and former CFO.  (Of course, these are only allegations that must be proved by the AG.)

As to the remedial undertakings to improve disclosure and corporate governance standards, frankly, to me these sound like window-dressing and somewhat pro forma measures designed to bolster a "get-tough" posture.  Does giving BofA shareholders "say on pay" for three years accomplish any meaningful remediation?

Maybe Judge Rakoff would like to free up his calendar -- the first action is scheduled to go to trial in March -- and so he'll sign off on this.  But the second proposed settlement is not likely to alleviate his frustration with the SEC's settlement process.

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