Judge Rakoff is Not Buying What SEC and Bank of America Are Selling

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.

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  1. attempter

    Unfortunately he only repeated his order to go back and try again.

    This was an insult to the intelligence and integrity of the court and of everyone else. One wonders what would be the fate of a common litgant who engaged in such brazen, contemptuous behavior.

    (Though the NYT's Floyd Norris, while sticking up for the shareholders' interest here, saw fit to say he considered the judge's solicitude for the public's money to be irrelevant and hard to understand. So I guess he'd disagree that the rest of us have any legitimate interest here.)

  2. DownSouth

    There is precious little doubt that BoA and the SEC are playing on the same team.

    Why is it that so many Americans persist in their nationalistic boosterism, failing to see that there is no difference whatsoever between the U.S and Mexico? Here in Mexico the government, the police and the drug capos all play on the same team. In the U.S. we see the same thing with the government, the regulatory authorities and the big banks.

    The only difference is that here in Mexico the people know they are the hijos de la chingada, and in the U.S. most Americans still think their shit don't stink.

  3. skippy

    And the parade marched by with much fanfare, because the flag did wave.

    skippy….Get a pin y'all, only real Americans *BUY* their patriotism at the news agent or corner shop.

    PS. umm who was the last lot to employ that trick?

  4. albie

    I am campaigning to be Dictator for 24 hours.

    I solemnly promise to have my thugs barge into the offices of BoA, ML and the SEC. They will gather all the directors and senior management, they will be brought to the people's court, tried, condemned and promptly hung on the lamp posts surrounding the public squares. All of their property will be seized and distributed to my supporters. All of this in less than 24 hours.

    If you make me the Dictator, this will be my first and only order of business. After which, I will establish a committee to implement democratic reforms and resign my office.

    My best regards to all,

    El Cabron

  5. Siggy

    Gotta love that Judge. He has it right.

    On the other hand the SEC has it wrong. Now, what is at issue here is that BOFA and ML appear to be witting particpants in a cover-up. The fact of the proposed bonuses was known to both parties; and, it appears that neither wanted to make a public disclosure of the impending bonuses.

    In arranging the acquisition of ML by BOFA, the Fed and the Treasury probably saved us from a gigantic meltdown of the financial system. On the other hand the acquisition was apparently made without full disclosure. Moreover, the bonuses appear to be unwarranted in that ML was effectively bankrupt!! Should have been in the bankruptcy court in the first place.

    The Fed and the Treasury are doing everything possible to protect the network of 'primary dealers'. Why?

  6. Unsympathetic

    I disagree completely with the gratuitous assumption that "Fed and the Treasury saved us from a gigantic meltdown."

    Nothing would have melted down. NOTHING. This is simply a brazen lie by bankers so they can steal yet another trillion dollars for themselves.

    Wake up and smell the coffee. Banks do not have your best interests at heart.

  7. Independent Accountant

    Errata. The 1995 "thing" was the Litigation Reform Act. Stoneridge was in 2008. What was amazing about Stoneridge is Scalia reversing the position he took in Halberstam v. Welch.

  8. Yves Smith


    Beg to differ, Please see Central Bank of Denver versus Interstate Bank of Denver. I do have the date wrong, but it was 1994. Gutted secondary liability long before Stoneridge. LRA was icing on the cake.

  9. Stuart Levine

    Yves–To the extent that either BofA or Merrill Lynch is raising, as a defense, that they were merely following the advice of their lawyers, they have waived the attorney/client privilege.

    Apparently, BofA/ML are relying on the contention that (i) they have not raised the "advice of counsel" defense with respect to the proceedings before the District Court and (ii) their waiver of the privilege before the SEC does not extend to the Court. See this discussion in AmLaw Daily:


  10. http://www.erikorganic.com/dining-room/dining-room-table.shtml

    I have seen some rural banks fail and the officers just got away with it and after 2-3 months opened another rural banks under new name. That’s why I have no more faith in rural banks.
    I wish that there will be stricter laws and more accountability for bank officers/owners.
    I have seen people parted with their hard earned money and treated with contempt when they asked for their money back.
    Even getting the deposits through the PDIC has been torture to them considering these are just ordinary folks.

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