Bank of America and the Securities Exchange Commission (SEC) were recently blasted in a ruling issued by Federal District Judge Jed S. Rakoff.
On August 3, 2009, the SEC brought an action against Bank of America alleging that it had lied to its shareholders. In seeking its shareholders’ approval of the $50 billion acquisition of Merrill Lynch, Bank of America issued a proxy statement that Merrill would not pay year-end bonuses to its executives prior to the merger without Bank of America's consent. However, according to the SEC, Bank of America had already authorized Merrill to pay up to $5.8 billion in bonuses and didn't share that information with shareholders.
After commencement of the litigation, the two parties proposed a settlement deal, where Bank of America agreed to pay $33 million without admitting or denying wrongdoing. Judge Rakoff, not only rejected it, he criticized the very ethics of the deal:
"[T]he proposed Consent Judgment is neither fair, nor reasonable, nor adequate. It is not fair, first and foremost, because it does not comport with the most elementary notions of justice and morality, in that it proposes that the shareholders who were the victims of the Bank's alleged misconduct now pay the penalty for that misconduct."
This decision is a hard blow to both parties.
The New York Attorney General will likely consider whether to file civil charges against Bank of America executives over their role in failing to alert shareholders to mounting losses and bonus payments at Merrill.
The SEC – who has tried to mend its image since its failure to detect Bernard Madoff's fraud scheme – must struggle to regain credibility for its enforcement efforts. Judge Radkoff found that the SEC was way too lenient. Now, the SEC may be forced to mount a court battle against one of the biggest U.S. banks over one of the touchiest issues of our financial times - executive pay. The trial is set for February 1, 2010.
Judge Rakoff’s decision is certainly worth reading: