Judge Rakoff’s People’s Court

August 10, 2009

Judge Jed Rakoff’s courtroom at the federal district court in Manhattan will turn into a people’s court of sorts as he looks to get to the bottom of the paltry $33 million Bank of America settlement with the SEC, which was looking into whether the bank misled shareholders about bonuses paid to Merrill Lynch employees.

The settlement amount is peanuts next to the $5.8 billion in authorized Merrill bonuses and the billions the government injected into the bank to keep it afloat.

Reuters reported last week that lawyers expect the judge “to focus on whether the fine is in the public’s interest, particularly given that Bank of America has taken $45 billion of taxpayer funds from the federal Troubled Asset Relief Program.”

As fellow blogger, and also editor for the U.S. commentary service at Reuters, noted last week, the hearing is also an opportunity to answer some of the questions alleged in the complaint.

The judge’s refusal to rubber stamp the S.E.C. settlement is admirable. The failure to disclose the agreement on bonuses was not simply an oversight or unintended misdirection. The bank, according to the S.E.C. complaint, made statements that were “materially false and misleading.”

Yet the only one at Bank of America who appears to have lost his job as a result of the bonuses was John Thain, who took the fall and was unfairly made to appear as if he was responsible for the bank’s lack of candor.

Bank of America needs to come clean about the Merrill acquisition. Monday’s hearing would be a good place to start.

The hearing is scheduled to start at 4pm.

Not everyone is happy to see BofA go through the wringer again, though.

The judge’s decision to call a hearing on the matter coupled with new information suggesting BofA was aware of $2 billion in as yet undisclosed losses two days before the deal closed prompted Dick Bove of Rochdale Securities last week to send out a report defending Ken Lewis against what he viewed as a “politician/press vendetta.”

In Bove’s eyes, the Merrill acquisition made money for BofA shareholders since the company’s shares and  have increased. (Shares Monday were at $16.68, up from $12.94 per share at the end of December when new informaton about Merrill losses supposedly reached BofA management). “In essence he is supposed to be fined and fired for adding value to the company’s earnings and its stock price. Some might think that this is absurd; I do.”

But what about shareholders making their own decisions about whether they want to renew their faith in the company or cut their losses based on ALL material information available? It’s about trust and the settlement between SEC and BofA doesn’t help restore it. Hopefully, Rakoff’s hearings can do more.


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