SEC should get tougher with BofA

Aug 11, 2009 21:23 UTC

In the Bank of America Merrill Lynch bonus imbroglio, the SEC has proposed a settlement in which, once again, the defendants neither admit nor deny wrongdoing.

Once again, the corporation would pick up the fine while responsible individuals escape uninjured. And once again, the public would be left wondering what actually happened. This isn’t justice, nor will it deter fraud.

These were the frustrations expressed by Judge Jed Rakoff in court yesterday. He refused to approve the settlement because he wants to know the truth: Who was responsible for misleading shareholders, and how did they settle on a fine of $33 million?

He told both sides to return to court with more details in two weeks. For the public’s sake, it’s a good thing he did.

In this case, it isn’t just shareholder’s money at stake. It’s taxpayers’. Our bail-out cash saved the bank, and we deserve to know what went on.

What the judge can accomplish isn’t clear. But the simple exercise of forcing the SEC to provide more details of its case would be very valuable.

The SEC’s eagerness to settle without naming names is particularly frustrating. It insists Bank of America, not executives, misled shareholders about Merrill bonuses by deliberately omitting relevant documents from its public filings.

But corporations don’t mislead, people do. And if shareholders were injured, why are they the ones paying the $33 million fine?

“It’s very easy to plea-bargain with shareholders’ money,” says Columbia law professor John Coffee. It’s a shame when the SEC allows them to.

A big problem is that the SEC needs to rethink its definition of success. A drive-by settlement that collects a token payment for fraudulent behavior which the other side neither admits nor denies accomplishes nothing.

Except, perhaps, leaving Bank of America CEO Ken Lewis and colleagues off the hook. They’d obviously prefer the matter went away, not least because more disclosure will provide fodder for private lawyers targeting their bank.

But as Georgetown law professor Donald Langevoort put it to me: “If people remain wealthy after they have engineered a fraud because of the way a settlement is structured, then neither justice nor deterrence is accomplished.”

To be fair, the SEC needs a much bigger litigation budget to go after the likes of Bank of America. But even so it has to be more willing to go to the mat in important cases like this, where it isn’t just shareholders’ money at stake. It’s ours.


The perpetrators should be held personally responsible for their misconduct. They have demonstrated that their word is worthless. BAC shareholders were induced by their fraudulent misrepresentation to vote for the merger. I want my vote back!
These self-interested people should be barred from serving in public companies because they are unethical. They ostensibly read then signed the documents. They remained silent and failed to correct the error to our detriment. It is their job to look out for our interests. For that they are well-paid.
Let them be accountable. The current settlement offer penaliizes the shareholders (decreased dividend) and customers (increased fees and interest). This is unacceptable because we did nothing wrong.
Thank you.

Posted by Pat Fox | Report as abusive

Judge Rakoff wants facts! Notes from yesterday’s hearing

Aug 11, 2009 00:54 UTC

Hopped over to courtroom 14-B at 500 Pearl Street yesterday afternoon where I saw Judge Jed Rakoff hammer SEC and Bank of America lawyers over the proposed settlement regarding Merrill Lynch bonuses.

The news is that Rakoff refused to approve the settlement.  He ordered the lawyers to get to the bottom of the “who/what/where” of the case, saying the settlement “seems to be lacking in transparency.”  He’s asked them to file briefs answering those questions on the 24th, and then responses on September 9th.

The hearing itself was very interesting.  Rakoff was clearly very skeptical of the arguments presented by both legal teams, which seemed rather unimpressive.

The judge wondered immediately why, given the “serious questions” raised in its complaint, the SEC wasn’t going after more facts.  If BofA and Merrill conspired to lie to shareholders about bonuses that had been agreed to when the merger was signed, then why isn’t the SEC trying to figure out who is responsible?  “Was it some sort of ghost?  Who made the decision not to disclose [the bonuses]?” said Rakoff.

David Rosenfeld, lead lawyer for the SEC, meekly replied that they haven’t made any allegations against specific individuals.  This clearly didn’t satisfy Rakoff who argued that to make the complaint, they “must have determined who physically committed these acts.”

[By the way, Rosenfeld struck a few of us in the gallery as badly prepared.  He seemed to stumble a lot, and the judge and court reporter repeatedly told him to speak up.  He wasn't familiar with specifics so frequently had to defer to another SEC lawyer.  Even though the hearing revolved around BofA's proxy filing, Rosenfeld and his team didn't have a copy of the document with them.]

So who led the merger negotiations when the discussion of bonuses came up?  The SEC offered two names: Greg Curl for BofA and Greg Fleming for Merrill.  Of which the SEC says it has only spoken to one: Fleming.

Were details of those negotiations circulated to top management?  Yes, Merill CEO John Thain and BofA CEO Ken Lewis were aware of them according to the SEC’s lawyers.

But according to BofA’s lawyer, Cleary Gottlieb’s Lewis Liman, they apparently weren’t aware of what was in “the disclosure schedule,” the document where bonus details were laid out.  That schedule was supposed to be attached to the SEC filing detailing the merger.  Conveniently, it wasn’t.  And of course that’s nobody’s fault.

Oddly, given Liman’s insistence that the proxy was very thorough, Rakoff didn’t ask him why the disclosure schedule wasn’t attached.

Rakoff also asked the SEC lawyers why the settlement is so puny.  A $33m fine for $3.6 billion worth of misconduct?  “Why isn’t this a grossly unfair amount?” he asked.  SEC lawyer David Rosenfeld seemed badly prepared for this question.  He cited the Wachovia/First Union case, saying that $37 million settlement was the right precedent.  Again the judge was skeptical, noting it revolved around $500 million worth of misconduct.  Here you have $3.6 billion.

More to the point, perhaps, Rakoff asked why the settlement is being collected from the corporation and “not from individuals responsible for orchestrating the misleading [SEC filing]?”  Rosenfeld mumbled something about the degree of misconduct, the need for deterrence and finding the closest precedent to justify the structure of the settlement.  As for going after specific individuals, Rosenfeld says he can’t.  The executives are all hiding behind attorney-client privilege.  The judge was not impressed with this excuse, noting that if BofA execs are asserting they relied on advice of counsel, which they seem to be, then they have to waive privilege.

Liman offered some pretty pathetic arguments of his own…

  • People shouldn’t have been surprised by the Merrill bonuses because the company had already accrued $12 billion for that purpose through Q3.

What do you do with this?  Merrill may have had an accounting entry saying they owed their people bonus money, but Merrill wouldn’t have lasted long enough to PAY the bonuses had it not been for bailouts.

  • He argued that $3.6 billion wasn’t a lot of money.  After all it worked out to an average of $91k per recipient.

“I’m glad you think $91k isn’t a lot of money,” retorted the judge.  And in any case, as NY Atty General Cuomo reported two weeks ago, nearly 700 Merrill employees got bonuses north of $1 million.  149 got more than $3 million.

  • Liman also trotted out the cliché about bonuses being necessary for “retention.”  To this Rakoff responded with the obvious: “how many banks were hiring people when the bonuses were paid?”
  • My least favorite defense argument was about the structure of TARP.  Since it came in the form of preferred stock, which has a fixed dividend, Liman argued its value wasn’t impacted by expenses like bonuses.

Liman forgets that besides preferred, TARP investments included warrants, essentially options to buy common stock.  Of course the common is impacted by expenses.

And how is the value of preferred stock not impacted when $3.6 billion is subtracted from the balance sheet?  That’s a lot less cushion protecting preferred stockholders in bankruptcy.  Not exactly a far-fetched scenario only a few months back.

  • Last Liman argued that no one could have been misled by the bonuses because they weren’t a surprise.  He waved his hands in the air suggesting it would be impossible to find anyone, anywhere in the press who didn’t expect Merrill employees to get incentive comp.  This is Wall Street(!) he protested.

Indeed it is.


I have read 8-10 articles on this court hearing and this is the best so far. I can’t help but wonder why the media gives the hearing and questioning such incomplete coverage? I hope that Judge Rakoff continues his common sense approach in a couple of weeks.

Posted by Fireman1979 | Report as abusive