Commentaries

The SEC is still lame

Don’t believe the hype about the new sense of “urgency” at the Securities and Exchange Commission.

The Wall Street Journal reports that the SEC’s recent string of enforcement actions against Bank of America, General Electric and former AIG chieftain Hank Greenberg is part of a new get tough campaign by SEC Chairman Mary Schapiro. But don’t believe it.

Settling investigations that are so old that the case files are getting green mold on them isn’t the sign of regulatory toughness. It’s simply an attempt by regulators to clean-up the docket so the litigation papers can be sent to cold storage.

Sure, the SEC gets some credit for moving quickly on the Merrill Lynch hidden bonus investigation. But the $33 million fine that Bank of America has agreed to pay to resolve the matter is chump change. And BofA CEO Ken Lewis has an incentive to settle, as he tries to sweep last year’s messy merger with Merrill under the rug.

But as US District Judge Jed Rakoff showed during a Monday court hearing, the SEC’s proposed $33 million settlement with BofA is nothing more than business as usual for the nation’s top securities cop. Rakoff got BofA’s lawyer to acknowledge that in agreeing to the settlement, the big bank doesn’t believe it did anything wrong in failing to disclose to investors that Merrill paid big bonsues to some of its employees.

The admission by BofA’s lawyer reveals a fundmental flaw in how the SEC goes about settling high profile cases. By allowing parties to pay a fine without “admitting or denying” the alleged regulatory offense, the SEC is nothing more than a collection agency.

It’s high time for the SEC in signature cases to require a bank, broker or rogue Wall Street executive to admit some liability before settling a civil enforcement action. And if that condition is a dealbreaker, then go ahead and sue ‘em.

Time for BofA to come clean

It may be outrage fatigue, but it is surprising that there has not been more of a public outcry over whether Bank of America misled investors about its acquisition of Merrill Lynch.

Yes, there were three House committee hearings about the deal, but the focus of those was on whether the Treasury and Federal Reserve bullied Ken Lewis, the Bank of America, into closing the deal for the good of the financial system.

But how much did Bank of America know about the scale and direction of the selling losses at Merrill Lynch before shareholders voted on the acquisition on Dec. 5? Why didn’t the bank speak out about the agreement with Merrill on bonuses?

Now a federal judge wants to get some answers. Judge Jed Rakoff of the federal district court in Manhtattan has held up the settlement reached this week between Bank of America and the Securities and Exchange Commission over the bank’s disclosure on the Merrill bonuses, Reuters reports. The judge has ordered a hearing for Monday afternoon.

“Despite the public importance of this case, the proposed Consent Judgment would leave uncertain the truth of the very serious allegations made in the complaint.” The hearing has been set for Monday afternoon.

The judge also seemed to suggest that the proposed, paltry $33 million penalty in the settlement may be something of a wash trade for taxpayers: “The proposed Consent Judgment in no way specifies the basis for the $33 million figure or whether any of this money is derived directly or indirectly from the $20 billion in public funds previously advanced to Bank of America as part of its ‘bail out.’ ”

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.”

The revenge of Madoff’s victims

By Lynnley Browning (Lynnley Browning is a guest columnist. The views expressed are her own. She is a frequent contributor to the business pages of The New York Times and is a former Moscow-based correspondent for Reuters, where she covered energy and commodities.)

Some have argued that the victims of Bernie Madoff’s enormous fraud should simply take their lumps for having trusted their money to the greatest con artist in history.

The victims, not surprisingly, disagree. More important, many of them are organizing in a way that could change the way investors are treated in the future. As the Obama administration pushes to add greater protections and even a new agency for investors, the Madoff victims stand to make an impact that goes beyond simply being objects of pity. (more…)

Come on Massey: man or mouse?

Bank of America’s settlement with the Securities and Exchange Commission sheds some light on the shambolic merger agreement the bank struck with Merrill Lynch last autumn, and how it neglected to inform its own investors of the monster bonuses it then allowed Merrill to carry off.

The word “allowed” is the mot juste here, by the way. The key schedule to the merger agreement (undisclosed by BofA but revealed by the SEC) makes it clear that BofA authorised what was in the end a payola of $3.6 billion in accelerated bonuses to Merrill bankers, 60 per cent of which was paid in cash.

That’s $2.2 billion of cash out. At BofA’s low point in Febrary, it was a fifth more than the value the deal’s terms placed on the whole of Merrill.

What’s more, what the SEC raises a lot of questions about the testimony BofA boss Ken Lewis gave to Congress on the subject in February.

“[Merrill] were a public company until the first of the year, they had a separate board, separate compensation committee and we had no authority to tell them what to do, just urged them what to do,” said the chief executive. Well yes, up to a point. But only because BofA had specifically authorised Merrill to pay out bonuses within certain defined cash limits subject only to “consultation” with it.

Yet when Thain was pushed out in January 2008, the BofA spin machine was in overdrive suggesting that Thain had not kept Lewis informed about the scale of Merrill’s losses, had blindsided him with the bonus payments and also some lavish interior work Thain did on his office. This was pretty much all bilge. BofA spokesmen may have been the ones whispering in journalists’ ears but they must have been acting with Lewis’s consent.

BofA needs to put the disastrous Merrill acquisition behind it. But it can only do this when the board has got to the bottom of the Thain dispute (and remembered to tell investors this time). If Lewis has abused his position or lied, he must go at once.

Cox’s charmed life after the SEC

During the financial crisis, Christopher Cox was a Zelig-like creature, always somewhere in the background, but never seen to be doing anything of consequence.

After Bear Stearns collapsed, when Lehman Brothers edged toward the brink and the entire securities industry quaked, what was the major initiative of the Securities and Exchange Commission under Cox? A misguided effort to rein in short selling.

Cox is certainly not to blame for the crisis, but his limp, ineffective response to it was an embarrassing display. And that’s even before one brings up the subject of Bernie Madoff.

Yet failure has not been an obstacle to Cox’s post-Bush administration career plans. He will join the law firm of Bingham McCuthen as a partner in his old stomping ground of Orange County. Bingham McCutcheon has been building its securities law practice, hiring two former Bear Stearns lawyers last year and a former enforcement director of the Commodity Futures Trading Commission.

So what did Bingham McCutcheon see in Cox? Well, someone was impressed.

Jay Zimmerman, the law firm’s chairman, told Bloomberg News:

“I sat down with him in D.C. and I thought, ‘This is an incredibly impressive guy. He’s very smart, he has a tremendous pedigree and he’s a real star in Orange County.’ ”