Judge Gives Tepid OK to SEC, B of A Settlement

A federal judge yesterday reluctantly approved the Securities and Exchange Commission’s $150 million settlement with Bank of America Corp., calling the agreement “better than nothing,” but “half-baked justice at best.”

In a 15-page opinion and order, Judge Jed Rakoff, of the U.S. District Court for the Southern District of New York in Manhattan, said that based “solely on the merits ... the court would reject the settlement as inadequate and misguided.”

“But as both parties never hesitate to remind the court, the law requires the court to give substantial deference to the SEC as the regulatory body having primary responsibility for policing the securities markets, especially with respect to matters of transparency,” Rakoff said, adding that “judicial restraint” is even more important.

Under the settlement, the bank would pay $150 million — which would be distributed to harmed shareholders, and would strengthen its corporate governance and disclosure practices — for allegedly misleading shareholders about its merger with Merrill. 

Rakoff’s concerns about the settlement stem from the fact that the SEC proposed it about the time New York Attorney General Andrew Cuomo filed civil charges against the bank and two former executives for allegedly misleading shareholders and the federal government. Both the SEC and Cuomo claim the bank allowed shareholders to approve its merger with Merrill Lynch without disclosing that the investment firm was planning to pay out billions of dollars of bonuses to employees and was facing huge losses.

“The SEC and the bank have consistently taken the position that it was, at worse, the product of negligence on the part of the bank, its relevant executives, and its lawyers (inside and outside) who made the decisions (such as they were) to nondisclose on a piecemeal basis, in which inadequate data coupled with rather narrow parsing of the disclosure issues combined to obscure the combined impact of the information being withheld,” Rakoff said.

However, Cuomo “reached a more sinister interpretation of what happened,” contending the bank and former officials were “motivated by self-interest, greed, hubris, and a palpable sense that the normal rules of fair play did not apply to them,” the judge said.

Rakoff earlier this month asked both the SEC and Cuomo for the information they used to support their conclusions. In his order he said it was reasonable of the SEC to find the bank and officials acted negligently rather than intentionally.

But he complained that the “greatest defect” of the settlement is that “it advocates very modest punitive compensatory and remedial measures that are neither directed at the specific individuals responsible for the nondisclosures nor appear likely to have more than a very modest impact on corporate practices or victim compensation.”

Rakoff admitted the remedial actions the bank must take under the settlement “should help foster a healthier attitude of 'when in doubt, disclose.’ ” The judge demanded, and got the bank to agree, that the new independent auditor and disclosure counsel the bank must hire be approved by the SEC and the court. However, the bank refused the judge’s request that its compensation consultant be chosen jointly by the SEC and the court, as well as the bank’s compensation committee. Rakoff said this would not be a “dealbreaker.”

While the judge acknowedged the $150 million penalty is greater than the original SEC-proposed $33 million penalty that he rejected, he worried shareholders will get “a few pennies per share.” The settlement actually covers two SEC lawsuits, one it filed against Bank of America in August for failing to disclose the planned bonuses to shareholders, and another it filed against the bank in January over its failure to disclose Merrill’s losses.

“We are pleased that the court has approved the settlement, which we believe is fair, reasonable, and in the best interest of investors,” the SEC said yesterday.

“The settlement calls for the imposition of the largest financial penalty ever assessed for violation of the commission’s proxy rules [and] sends a strong message that companies must give shareholders all material information about corporate transactions subject to shareholder approval,” it said.

Bank officials could not be reached for comment.

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