Securities Law Prof Blog

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

Tuesday, November 30, 2010

SEC's Inspector General Find No Improper Conduct in SEC's BofA Investigation

The SEC's Inspector General has posted its Semi-Annual Report to Congress Apr. 1  -- Sept. 30, 2010 on its website.  Among the items discussed is its Investigation of the Circumstances Surrounding the SEC’s Proposed Settlements with Bank of America, Including a Review of the Court’s Rejection of the SEC’s First Proposed Settlement and an Analysis of the Impact of Bank of America’s Status as a TARP Recipient (Report No. OIG-522).  During its investigation, OIG analyzed the SEC enforcement actions against BofA, including the first proposed settlement and its rejection by the Court; the second proposed settlement and its acceptance by the Court; and what role, if any, BofA's status as a TARP recipient played in the SEC's investigation, charging decisions and settlement discussions.

OIG reports its findings, including:

  1. Despite the Court's rejection of the SEC's first proposed settlement with BofA, the evidence did not show that SEC staff failed to diligently and zealously investigate potential securities law violations.
  2. OIG did not find evidence of improper conflicts of interest that formed the basis of the initial Congressional inquiry, but it did find that BofA's status as a TARP recipient had an impact on the favorable settlement that the staff first recommended to the Commission. 
  3. The OIG found that the enforcement staff felt pressure to bring a case against BofA promptly because of the internal interest in the case and its high-profile nature.
  4. Greater coordination and collaboration among law enforcement agencies would have more efficiently utilized government resources and sped up the investigation.

In a fascinating discussion, the Report recounts at length the SEC's decision not to name individual defendants.  It notes the differences in legal theory that were considered by the enforcement attorneys negotiating the first settlement and those who negotiated the second settlement (the first team was unaware that individuals could directly violate Rule 14a-9 and thought that Rule 10b-5, and its requirement of scienter, was the only viable theory; the second team did not suffer the same confusion), as well as difficulties created by ongoing investigations by the New York AG and the TARP Inspector General.  According to the SEC attorneys, the NYAG refused to share information and provide witness transcripts requested by the SEC; because the Court had limited the number of depositions the SEC could take, the SEC was not always able to remedy the refusal to produce transcripts and had to rely on attorney proffers.

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