A recent InvestmentNews op-ed on September 27 endorsed Judge Jed Rakoff’s action in the Bank of America settlement process. Bank of America is accused of lying to shareholders about $5.8 billion in bonuses paid to Merrill Lynch employees immediately preceding a merger between the two companies. The Bank approved the bonuses but did not disclose the payment to shareholders.
The Securities and Exchange Commission had negotiated a settlement of only $33 million that Judge Rakoff rejected and ordered the case to go to trial. He said that the settlement would have come out of the pockets of the very shareholders that BofA is accused of defrauding. Rakoff wrote in his order, “It is quite something else for the very management that is accused of having lied to its shareholders to determine how much of those victims’ money should be used to make the case against the management go away.”
InvestmentNews argues that the SEC is complicit in the process of fraud that it is supposed to regulate. Rakoff wrote that the settlement “suggests a rather cynical relationship between the parties: the SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger; the bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but also of the truth.”
The editorial suggests that the courts have stepped into the role previously occupied by the SEC. This change should alert the Commission to the glaring problems that it has in its regulatory powers. Rakoff protected both the shareholders of BofA and the American public. It is time that the SEC did its job.