naked capitalism

Judge Jed Rakoff is illustrating what an independent judiciary should look like, and the fact that his actions are being depicted as “unusual” says how spineless many jurists have become.

Sports fans may recall that Bank of America and the SEC came before the bench to approve a $33 million settlement of the failure to disclose the payment of $3.6 billion of bonuses by Merrill before the acquisition closed. The judge not only deemed the amount inadequate, but wanted to know why the SEC failed to charge individuals.

The SEC lawyers looked contrite at the hearing (August 10) while the Bank of America attorney attempted to brazen his way through with “What do you mean, this is Wall Street, everyone knows they pay bonuses there.” Rolfe Winkler’s comments from the last hearing:

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.

The SEC came back with parroting Bank of America’s ‘the dog ate my homework” defense: the lawyers did it. From the Financial Times:

The SEC, in a court filing on Monday, said BofA’s alleged failure to disclose bonuses paid to Merrill Lynch employees before the companies merged was largely the work of attorneys who advised the banks. The regulator said it was constrained by the fact that the bank had not waived attorney-client privilege.

Judge Rakoff’s ghost has not been banished.

I hope reader recognize how brazen this response is. Any company could hide behind any misdeed by blaming it on counsel. And there is a second layer to this position. Unhappy shareholders could not sue the lawyers for any chicanery. Incredibly, while the guy who drives a car in a bank robbery is an accessory to a crime, and thus subject to criminal charges, a 1995 Supreme Court decision, which overturned 60 years of rulings, found that advisors like attorneys were not subject to secondary liability in securities law matters. The practical effect is that attorneys and accountants cannot be sued by investors if they enable fraud or lesser violations by their corporate clients.

The judge wasn’t as feisty as last time (having to write rather than beat up the miscreants in person will tend to do that), but he is clearly not going to accept this rubbish. From the New York Times:

Responding swiftly, the judge questioned why the S.E.C. did not insist that Bank of America waive attorney-client privilege before striking a $33 million settlement. He also questioned whether bank executives — or the outside lawyers — should be charged in the case.

“If the company does not waive the privilege,” the judge wrote in his order, “the culpability of both the corporate officer and the company counsel will remain beyond scrutiny. This seems so at war with common sense.” The judge added that the filings Monday by the S.E.C. and Bank of America raised more questions than they answered, and set a deadline of Sept. 9 for both parties to come back with fuller explanations of who should be held accountable for the bonus disclosure decision.

Judge Rakoff is clearly not about to blink, and the SEC miscalculated in acting as if he would. It will be interesting to see what happens in the next round.