Those damned activist judges are at it again.

Thank Goodness
Those blasted activist judges.

How dare they consider “most elementary notions of justice and morality?”

Steve Pearlstein, writing in the Washington Post, expressed the dismay over U.S. Distinct Judge Jed Rakoff’s cavalier approach to the law:

I don’t know about you, but I’ve had it up to here with activist judges who think they can overturn decades of legal precedent and ignore well-established norms of legal behavior in the pursuit of vague ideals like “justice” and “morality”.

Whom do they think they are?

Before discussing the ruling by Judge Rakoff in rejecting a sweetheart settlement agreement reached between the Securities and Exchange Commission and Bank of America, a few words about the Judge. He is not a team-player. This is a District Judge who has had a promotion to the Court of Appeals for the Second Circuit repeatedly refused and has an impressive record of reversal from a Circuit that upholds District Court rulings at over a 70% rate. He has been labeled a maverick and has a long history of insisting on judicial transparency as well as corporate disclosure to stockholders and the public. In other words, he does not play well with others and runs with scissors. Ultimately, I have a cynical feeling that Judge Rakoff will be, once again, reversed and rebuked in this case. Not because he was in error or exceeded his authority to accept or reject a settlement; judges do that all the time. He will be reversed because the “Big Boys” do not take interference with their schemes lightly.

Without going into the more arcane aspects of the lawsuit and settlement, the SEC alleged that Bank of America executives lied to its shareholders about bonuses paid to Merrill Lynch executives following the organizations’ merger at the height of the 2008 financial crisis. The government agency alleged that Bank of America executives failed to report that top employees at Merrill Lynch were paid $3.6 billion in bonuses shortly before Merrill was acquired by the bank. The settlement reached by the parties and their attorneys would have Bank of America pay the US government $33 million in damages with no admission of wrongdoing.

Several aspects of the case really upset the Judge. First, SEC went after the corporations involved in the failure to disclose, not the corporate officials who schemed and hid the bonuses from the public. The settlement, therefore, would be paid by the corporations, i.e., the stockholders; the individual officials would end up free of legal or financial penalty. The Court quoted from the SEC complaint:

“[The Complaint by the Government alleged] that defendant Bank of America Corporation materially lied to its shareholders in the proxy statement of November 3, 2008 that solicited the shareholders’ approval of the $50 billion acquisition of Merrill Lynch & Co. The essence of the lie was that Bank of America “represented that Merrill had agreed not to pay year-end performance bonuses or other discretionary incentive compensation to its executives prior to the closing of the merger without Bank of America’s consent [when in] fact, contrary to the representation …, Bank of America had agreed that Merrill could pay up to $5.8 billion –- nearly 12% of the total consideration to be exchanged in the merger –- in discretionary year-end and other bonuses to Merrill executives for 2008.” Along with the filing of these very serious allegations, however, the parties, on the very same day, jointly sought this Court’s approval of a proposed final Consent Judgment by which Bank of America, without admitting or denying the accusations, would be enjoined from making future false statements in proxy solicitations [and would pay a fine of $33 Million to the Government]“.

In other words, the deal worked out with the SEC had Bank of America promising not to lie to its shareholders, which it had denied doing in the first instance, and paying a fine amounting by comparison to peanuts! Judge Rakoff continued,

the parties were proposing that the management of Bank of America – having allegedly hidden from the Bank’s shareholders that as much as $5.8 billion of their money would be given as bonuses to the executives of Merrill who had run that company nearly into bankruptcy – would now settle the legal consequences of their lying by paying the S.E.C. $33 million more of their shareholders’ money.
This proposal to have the victims of the violation pay an additional penalty for their own victimization was enough to give the Court pause. …. Having now carefully reviewed all these materials, the Court concludes that the proposed Consent Judgment must be denied.

Now here is the “activist” side of Judge Rakoff coming out.

[The] Court, even upon applying the most deferential standard of review for which the parties argue, is forced to conclude that the 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.

The second aspect of this case that riled the Judge was the assertion by Bank of America that the individual officers and executives that kept the bonuses hidden were only following the advice given by their lawyers. Judge Rakoff then asked the next logical question. If the lawyers, officers of the court, were intentionally advising corporate officers to lie to the shareholders, the lawyers were participating in a fraudulent practice, then why has the SEC not attempted to punish them?
There will be a trial and the Court seems determined to have the Government enforce the law to its fullest extent; protect shareholders and, ultimately the American taxpayer.

In the past, Federal judges have sent settlement deals back to the parties and asked that they be re-worked or re-negotiated. On this occasion, Judge Rakoff threw the whole thing out and set a trial date. The Court and I have similar objections to the SEC settlement.

I was accustomed to the weak regulation and enforcement under an inattentive SEC when President Bush was in charge; regulation of the finance industry was non-existent and the collapse of the economy last year was the result. I, and others, expected an Obama administration would revitalize the needed oversight and enforcement. Instead, we have the same situation, businesses doing anything they please and a regulatory system content to just watch.

Judge Rakoff expressed his opinion with far greater eloquence. The rejected 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.

Thank Goodness for “activist”, independent judges and courts, because, in the final analysis, that’s who is looking out for all of us.

Tags: Bank of America, Court, Jed Rakoff, Merrill Lynch, S.E.C., settlement