Judge Takes SEC and Bank of America Lawyers to Woodshed Over Merrill Bonus Settlement

Rolfe Winkler of Reuters and Louise Story of the New York Times sat in on the hearings on the SEC-Bank of America settlement today. Those who have followed this little drama may recall:

Merrill paid its employees bonuses of $3.6 billion prior to the close of the deal with Bank of America. It was very clear BofA had to have authorized it (if you know anything about deals, it was inconceivable that they hadn’t)

Bank of America failed to disclose the bonus payment in the proxy filing for the deal

Judge Jed Rakoff pummeled both sides, with his questions focusing on basic issues;

Who exactly knew what when?

Why were not individuals paying fines? This failure to disclose did not drop from the sky.

Why was the settlement so low? ($33 million versus $3.6 billion)

The New York Times depicted the judge’s treatment of both sides as harsh:

During a hearing in New York that was heated at times, the judge was scathing about the settlement, in which the S.E.C. accused Bank of America of misleading its shareholders. Bank of America neither admitted nor denied wrongdoing.

Bank of America and Merrill Lynch, Judge Rakoff said, “effectively lied to their shareholders.” The $3.6 billion in bonuses paid by Merrill as the ailing brokerage giant was taken over by the bank was effectively “from Uncle Sam.”

What is amusing but also annoying is the cluelessness of both sides. I have a bit more sympathy for the SEC, only because from what little I can tell, the agency’s staff has been discouraged from taking a tough line in enforcement for a very long time. Under Arthur Levitt (1993-2001), the SEC was keen to go after certain issues (Levitt, ironically, was big on accounting, for instance), but Congress repeatedly threatened to cut the SEC budget to force Levitt to curb his efforts. The SEC during the Bush Administration was hardly a hotbed of aggressive action. It got on the dot bomb bandwagon because it was impossible not to, given Eliot Spitzer’s aggressive stance.

The SEC lawyers at least seem to be embarrassed and don’t try offering lame defenses. According to Winkler:

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 lead lawyer for the SEC meekly replied that they haven’t made any allegations against specific individuals. This clearly didn’t satisfy Rakoff…

So who led the merger negotiations when the discussion of bonuses came up? The SEC offered two names: Greg Curl for BofA and Greg Fleming for Merrill. Of which the SEC says it has only spoken to one: Fleming.

Were details of those negotiations circulated to top management? Yes, Merill CEO John Thain and BofA CEO Ken Lewis were aware of them according to the SEC’s lawyers….

The judge also asked the SEC lawyers about the pathetic size of the settlement ($33 million) relative to the size of the alleged misconduct ($3.6 billion of bonuses paid). SEC lawyer David Rosenfeld seemed badly prepared for this question. He cited the Wachovia/First Union case, saying that $37 million settlement was the right precedent for this case. Again the judge was skeptical, noting it revolved around $500 million worth of misconduct. Here you have $3.6 billion.

But more to the point, Rakoff asked “why isn’t this a grossly unfair amount?” And why is it being collected from the corporation and “not from individuals responsible for orchestrating the misleading [SEC filing]?” Rosenfeld mumbled something about the degree of misconduct, the need for deterrence and finding the closest precedent in their determination that the $33 million figure is “reasonable.”

Now some readers will argue that this is proof that regulation is hopeless, and that misses key issues. First, we did once have effective regulation in the US. There has been an over 30 year effort by corporate interests and those ideologically attuned with their views to neuter regulation, by weakening rules, by undermining regulators’ moral authority, by keeping enforcers starved of budget.

This is no different than what happens when staffing is inadequate. You have too many cases spread over too few people. The pressure is to wrap up things quickly and move on. Or you get the other syndrome: extreme multitasking, with nothing done very well and everything taking too long.

And the presumed to be more on-the-ball private sector BofA counsel does not comport himself any better. And remember, BofA is the one who stands to lose here. The tone of the judge’s filing denying the settlement and calling for the hearing signaled that he regarded the settlement as inadequate. But is there any sign of real preparation in these interactions? Again, from WInkler:

But according to BofA’s lawyer Lewis Liman, they [Thain and Lewis] apparently weren’t aware of what was in “the disclosure schedule” which would have had details regarding bonuses. That schedule was supposed to be attached to the SEC filing detailing the merger. Conveniently, it wasn’t….

Liman offered some pretty pathetic arguments of his own…
People shouldn’t have been surprised by the Merrill bonuses because the company had already accrued $12 billion for that purpose through Q3.

What do you do with this? Merrill …wouldn’t have lasted long enough to PAY the bonuses had it not been for bailouts.

He argued that $3.6 billion wasn’t a lot of money. After all it worked out to an average of $91k per recipient.

“I’m glad you think $91k isn’t a lot of money,” retorted the judge…

Liman also trotted out the cliché about bonuses being necessary for “retention.” To this Rakoff responded with the obvious: “how many banks were hiring people when the bonuses were paid?”…

Last Liman argued that no one could have been misled by the bonuses because they weren’t a surprise. He waved his hands in the air suggesting it would be impossible to find anyone, anywhere in the press who didn’t expect Merrill employees to get incentive comp. This is Wall Street(!) he protested.

The judge wasn’t buying that either. From Story at the New York Times:

“Do Wall Street people expect to be paid large bonuses in years when their company lost $27 billion?”

Notice that. The attorneys have bought completely into the Wall Street entitlement argument. I genuinely don’t think this is posturing; I think BofA counsel believes it and that was a factor in the lack of serous responses.

And why shouldn’t they? Those high pay levels form a rising tide that elevates the pay of all professionals serving the high-end financiers They have a vested interest in promoting the idea that these payments were warranted, even from an effectively bankrupt firm when the industry’s health was still very poor.

The judge ordered the two sides to reconvene in two weeks. He is also considering holding a separate hearing to determine whether the bonuses were justified.

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  1. PascalMontreal

    I am speechless. Really. If your country does not renew with at least some kind of economic logic (out the window for at least a decade now), this "recovery" will prove short lived. There are limits to the magic of backstops, denial, window dressing, and printing paper with numbers on it:


    Um. Less than 6 months ago the entire banking industry was on the brink of total chaos and now this? Plus bonuses and profits for banks after the biggest public-to-private transfer in History without prosecution? Plus speculative volumes on the NYSE? I am all good with "we have to save the world at all cost", but don't win chaos and more anything-goes bahaviour with it…

  2. Anonymous

    America is doomed, because the people that stole the entire national wealth are going to do less time and pay lesser fine than the street corner bud seller. And *everyone* knows it.

  3. Anonymous

    This judge is obviously a renegade vigilante and needs to be silenced.

    I bet Paulson in his plastic bubble is having a good laugh over these court proceedings.

  4. Hugh

    The SEC remains a paper tiger. $33 million is less than 1% of the bonuses involved. They would have done far better if they had just asked for tips from the recipients. The lack of resources argument doesn't apply. This was what I would consider a major case. Cash strapped as the SEC may be it still has the funds to undertake high profile cases. The fact that they did not even interview all of the principals involved is a question of competency and priorities, not cash.

  5. Anonymous

    Now some readers will argue that this is proof that regulation is hopeless,

    More readers will likely conclude that the regulators are hopeless.

    Rosenfeld mumbled something about the degree of misconduct, the need for deterrence and finding the closest precedent in their determination that the $33 million figure is “reasonable.”

    actually, $33m will likely viewed as just a minor inconvenient "cost of business" to pursue whatever a bank wants to do in the future. Now that they've been called on it, the SEC PR department is going to have a fun time explaining their mediocrity to the public–oh, wait a minute, they never bothered with the public, because the public doesn't offer them huge contracts to work for them after their SEC stint is over…

    Maybe we'll be lucky enough to see a judge go after Greenberg next (we sure as hell won't expect the SEC to do much, after all).

  6. Doc Holiday

    I can see many things happening with Rolfe Winkler:

    1. Found dead in bed with a hooker, who then tells a story on prime time cable, of amazing corruption on the part of Rolfe.

    2. A hooker comes forward at the next hearing and tells the press that Rolfe is a pervert, screaming and yelling as she rips off her blouse to revel a tattoo with his name and image and then hands out DVD's of herself, which document things she did on vacation with a person once purported to look somewhat like Rolfe.

    3. Rolfe retires early and is never heard from again.

    4. Rolf is hired by BofA or another bank and is never heard from again.

    5. Rolfe is hired by The SEC and then sent to Siberia to look for Ivan Denisovich's other set of books at some gulag that is linked to the Russian Mob, Enron and BofA.

    6. Rolfe is struck by lightning while playing golf with a hooker (who swears he had a hole in one).

    7. Rolfe resigns because of an affair with the male intern bailiff, who had recently had a change of heart and decided that his pulmonary hypertension could be treated by Viagra and that things would probably work out if he changed his diet and got a different job, where he wouldn't be sitting on his ass all day; like work at a bank.

    FD: The author has run out of time…

  7. ComparedToWhat?

    From Louise Story's NYT piece,

    "The lawyer for Bank of America periodically whispered what appeared to be suggestions to Mr. Rosenfeld [the lawyer for the SEC]."

    Such a heartwarming image! One can only imagine the tender endearments….

  8. Anonymous

    I guess the Einhorn bok wasn't enough. Maybe the SEC needs someone to write an encyclopedia about their case histories to realize that they need to change.

  9. Anonymous

    What about, Rolfe apparently appearing in a re-run of either Gilligan's Island or the first show of the 2009/20010 season of Who Wants To Be A Millionaire, and he apparently gets all the questions right and doesn't need a lifeline — and then a hooker jumps out of the audience and reveals the truth on live cable, where a tsunami of dumbfounded couch potatos gasp in unison as Rolfe's jaw drops after seeing what looks to be a video of someone that looks like him taking money from a high level DOJ spy who worked undercover for The SEC, who was really working as a double for BofA. However, as the camera zooms in on the cash, Rolfe tells the truth as if he's in a confessional booth and he spills his guts about the intern who was sent to him by some lobby group, and he couldn't say no, because he thought it would be un-ethical to say no to helping out someone that was underemployed…

  10. attempter

    Now some readers will argue that this is proof that regulation is hopeless, and that misses key issues. First, we did once have effective regulation in the US. There has been an over 30 year effort by corporate interests and those ideologically attuned with their views to neuter regulation, by weakening rules, by undermining regulators' moral authority, by keeping enforcers starved of budget.

    I would and do argue that over the past 30 years corporatism has become completely entrenched. Both structures (regulatory and legal) and personnel (as we see here, as combo of ideology, indoctrination, and greed) have become completely bottlenecked.

    (That one judge seems to be, at least in attitude, a rogue on behalf of the public interest, doesn't change the overall structural facts. And anyway we haven't seen how this case will end up yet. So far it's just talk.)

    Under these circumstances, I can't imagine how reform is supposed to happen. The people elected this person primarily because he promised Change, and he came into the best political environment for radical change any conventional politician is likely to have, and what happened?

    "Change" was a lie, and through that same old combination of corporatist ideology and characterless cowardice and conformism (a congenital inability to even imagine a system substantially different from this ine, right down to the bonus culture), Obama has ended up staking his presidency on an absolute bullheaded commitment to upholding and intensifying the status quo, with the profit and power of the banks being the priority of all policy.

    Obama and his entire policy is simply the mindset of the BofA lawyer write large.

  11. Anonymous

    I really don't care about size of the fines. What I want is jail time for all the crooks that we can get! The SEC is not doing enough because Mr. Obama clearly indicated that this is no time to act in "anger". There is an incestuous relationship between government and the bankers that is lubricated with money at all levels.

    "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?"

  12. Siggy

    I like the Judge.

    Both BofA and Merrill would like this to all go away. I suspect that the SEC should have a referral to the Justice Department for this case. Now if the settlement gets larger will BofA survive? Geithner would like the bank to survive because it's one of 16 'primary' dealers. On the other hand, the law has probably been broken and $33 mil is chump change when compared to the losses incurred by Merrill.

    I very much believe in honoring the contract; however, in this instance the contract should have been recognized as invalid in that the enterprise did not perform. If it has performed it wouldn't have needed a shotgun wedding bailout!

  13. Anonymous

    The lawyers's attitudes is perfectly normal. Wall Street is entitled to all that money and more. That's the American Way. I am sure they are pretty shocked by the judge's questions, having assumed it would be a pro forma hearing with some pontificating followed by martinis and scotch in chambers.

    From the lawyers's perspective, the amounts are indeed puny. $3.6 billion at a time when the government was handing out trillions in free cash to banks.

    Other than Madoff, has any individual paid any price at all for the largest fraud in history? Any Congressmen been impeached and executed for treason? Any bankers paid personal fines and gone to jail?

    It's the American Way, as American as Mom, apple pie, waterboarding, invading other countries, and supporting rabid third world dictatorships. God bless America…not.

    ps. I used anon. cuz I can't figure out how to log on. I ge rejected using my own identities.

  14. Anonymous

    The SEC recently published a number of job announcements, including for trial lawyers. I noticed the FDIC has been staffing up, too.

    I don't have a lot of faith that even if you get people at the SEC who want to do the right thing, they'll be allowed to. Politicians have a history of hamstrining them (the budget shenanigans pulled against the SEC by the GOP Congress in the 1990s were a disgrace; now we have Obama trying to take power from the SEC and give it to the Fed). A lot of our government institutions fail because Congress and the White House design them to fail.

    It's too early to tell, IMO, whether the failures here were failures of will or an agency who has been so reigned in in recent years, it has to relearn how to regulate. But I am coming to believe the SEC and FDIC are our only hope, as slim a hope as they might be. The Fed has never been much of a regulator (and the dynamics of Shapiro and Bair have been interesting in the internal administration fight over the plan to make it the super regulator). The OTS – ditto, plus it was among the worst run under Bush, which probably means more institutional damage. And we haven't heard much from OCC, although I would expect Gensler, who worked with Geithner at Treasury, to be more of a team player and less likely to do much regulating beyond the token gestures the administration seems to favor.

    The other thing I will say in favor of the SEC is that Shapiro, like Bair, seems to be pissong off Geithner. Which I take it to mean she must be doing something right. :-)

  15. Anonymous

    Where are the attacks on the marketing and advertising folks that created and perpetuate these entitlement myths and consumptive behavior in America?

  16. bob goodwin

    I see this a 'green shoot' for fairness. The SEC is part of the executive branch, and having watched their painful testimony to congress on the Madoff story, I cannot be surprised that they were unprepared.

    As Michael Lewis said, Goldman only owns one branch of government, and is renting a second. Now they may wish they had hedged more thoroughly.

    Jed may yet become one of the heroes of this story. Remember that it took 4 years during the depression to get securities acts through congress. This is a damn good turn of events in a very bad situation.

  17. Peripheral Visionary

    There are a number of reasons this has turned out this way, but I do think Yves' point about limited resources is correct. A court battle with Bank of America would have been (or will be, if it happens) a *major* commitment for both parties; and given that BofA's operating budget is the same order of magnitude as the SEC's, it can match, or even exceed, the legal resources of the entire SEC.

    The settlement approach has been taken to avoid massive court battles that would be a major drain on resources. Unfortunately, the regulated firms know that, and demand ridiculously low fines and non-admission of guilt as the price for avoiding going that route.

    The other factor is that a court battle involves a high level of risk for the SEC. Anonymous posters on blogs may be 100% convinved of wrongdoing, but judges and juries are not so easily convinced. This case looks bad for BofA, but unless the SEC can come up with legal evidence by way of e-mails, memos, and/or personal testimony to support its case, it could fall apart in court, and result in a massive waste of time and money.

    Pursuing this case will inevitably mean dropping a significant number of other cases. Is getting a more realistic fine, or even a restriction on BofA's activities (which would really send a message), worth dropping or putting off a number of clear-cut Ponzi scheme and insider trading cases? I would say yes, and I think most people here would agree, but the case for a quick and cheap settlement is not without its merits.

  18. Hugh

    If the SEC can't act effectively and forcefully in a case like this, it really has no reason to exist. Bank of America is wholly dependent on the US government but it is going to use its government given resources to overwhelm the SEC? Something is wrong with this picture. As for going after Ponzi schemes and insider trading, the SEC's record on both has been dismal to say the least. The BoA episode is just another example of how the SEC remains as ineffectual and captured by the interests it is supposed to regulate as ever. No amount of new funding can change such an entrenched culture.

  19. Anonymous

    PV: Pursuing this case will inevitably mean dropping a significant number of other cases.


  20. Anonymous

    Hugh: If the SEC can't act effectively and forcefully in a case like this, it really has no reason to exist.

    That's the best argument I've read so far.

  21. Anonymous

    1) Can someone revise the Artist's conception of the courtroom proceedings to have the SEC and BOA lawyers seated at the same table, and no one at the prosecution side?

    2) I bet the SEC spent more the $33 million "researching" this…indeed, if all they are capable of is "bad doggie, no cookie" actions, they do not deserve to exist.

    3) They should pick up their biggest bat and swing for the fences, and the SEC should keep all penalties (which should come from the individuals, not shareholders) to enhance enforcement financing….Congress should not be allowed to dip into enforcement fine successes.

  22. Anonymous

    4) The judge is going to need around the clock protection, until the case is done and people are jailed. At this moment in history, he's as valuable as a Founding Father.

  23. Peripheral Visionary

    @Anonymous 4:12, the SEC brings roughly two Ponzi schemes a week, and a comparable number of insider trading cases. A very rough guess would be that the BofA case would take five times as many enforcement resources and twice as long as a relatively standard Ponzi scheme, which means at least ten other cases (typically $50 million each) put on hold.

    I agree with the sentiment that the biggest cases should be the highest priority. But that comes at a cost. If the police department gets a high-profile case, they have to take it, but it's going to take a lot of resources, and a lot other crimes go unsolved in the process. Was it really worthwhile for the Washington police and the FBI to pour enormous resources into the Chandra Levy case, only to come up empty-handed (until a random break gave them the suspect several years later)?

    We just can't pretend that these decisions are easy and don't involve trade-offs. They aren't easy, and they do involve sacrifices. The SEC got the message loud and clear after Madoff–people want the Ponzi schemes shut down. They're doing that right now–and now the complaints are that lack of disclosure (hardly a flashing-red-light issue in my view, but opinions vary) isn't being prosecuted. But if they were to go after lack of disclosure, there would be complaints from the Zero Hedge rabble that market manipulation isn't being prosecuted.

    So, what's it going to be? What's the priority? Because the SEC can't be everywhere at once–time to decide what the emphasis should be, and cut the complaining on lack of regulation in areas that aren't high priority.

  24. Anonymous

    Peripheral Visionary
    It has already been recorded in Congressional testimony that Barnanke and Paulson threatened Lewis's job if he did not go through with the merger after Lewis balked.
    Tell me why there are not heads rolling over this. This is far more important than some measly ponzi scheme in the overall status of Justice in America.

  25. Anonymous

    PeripheralVisionary: "We just can't pretend that these decisions are easy and don't involve trade-offs. They aren't easy, and they do involve sacrifices. "

    What do you mean this wasn't easy? How much more clear-cut could this case possibly have been??? Sure, there are trade-offs–there's no such thing as a free lunch anywhere. But if they won't bother tackling any of the really big (and **glaringly** obvious) cases, then what the hell is the point of there existence? Why don't they at least be upfront about things and say that there standard is only to chase small fry who can't afford to really defend themselves? (you'll no doubt retort that the fall out would be terrible–it would be, and it would be bloody well deserved)

    "The SEC got the message loud and clear after Madoff–people want the Ponzi schemes shut down."

    Jesus–they needed F!@#ing public outrage of this magnitude to F!@#ING consider doing their goddamned jobs (poorly–the judge has done a better job in this case than the group of people who are supposed to oversee the industry)?? Where the hell else (other than the rest of the financial industry) is such insane incompetence tolerated, let alone lauded???

    And how much of this message have they actually "heard"? Greenberg has basically gotten off scott free. Moody's and S&P have no action against them for their ratings games. And the list goes on…and on…and on…and on…

  26. Yves Smith

    Anon of 11:52,

    You refuse to hear what Peripheral Visionary is saying, which is the SEC has limited resources and has to choose where to deploy them. And there is a clear track record that says they have been keep starved by Congress for some time.

    You also appear to have no understanding of what kind of effort it takes to prove things in court. Why do you think 95% of ALL cases are settled? Because it DOES take time and effort, a lot, to do the discovery needed to perfect a case.

    Did you read the judge's questions? He wants to know exactly who was responsible, among other things, You have counsel on the other side which is very well funded and is going to try every angle to limit the scope of investigation and to try to raise doubts about whatever evidence is found.

  27. Anonymous

    OK, Yves, the SEC has limited resources and can't deploy them towards going after big financial institutions, or any large company, especially those with political connections. As a result, they settle cases (incidentally, why are companies so willing to settle by a 20:1 margin? Perhaps because they're getting *really* sweet deals?).

    So now that we both agree that the SEC's been pretty useless (the argument is really only whether it's a question of incompetence or resources), what exactly are they god for? They offered to settle with Madoff. They settle with BAC, Greenberg, and GE for a pittance. OK, so SEC doesn't have the resources, and so everyone knows that if they get caught, they'll maybe have to pay a minor fine many years down the road, which reduces the SEC to a nuissance that slightly increases the cost of doing business. Again, what is the point? They're not even deterring other people.

    Einhorn wrote a BOOK on their and ALD's shortcomings (and they investigated Einhorn while leaving ALD alone). Does the SEC not have the resources to buy a $30 hardcover (how about the $15 paperback edition??) and talk to someone who wants to talk to them as a beginning point? Yes, I know–SEC did find that Allied broke securities laws. Too bad they didn't bother fining them, though (perhaps it required too much resources to bother?)

    I'm at a complete loss to understand what the SEC would have to do lose your support. They're ineffectual–I really don't understand how this is debatable.

  28. Anonymous

    Actually, Yves–please just delete the last comment (12:47am) . I like your site and I'm grateful for your input, and I don't see any point in posting this stuff if it's just p!$$!ng you off.

    All the best,


  29. ndk

    "Actually, Yves–please just delete the last comment (12:47am) . I like your site and I'm grateful for your input, and I don't see any point in posting this stuff if it's just p!$$!ng you off."

    I like your comments, and my suspicion is that Yves appreciates having dissident voices on Naked Capitalism. Debate has long been one of the finest qualities of the blog.

    Indeed, further criticism could be made that the SEC has misdirected its limited resources, pursuing relatively trivial and meaningless insider trading cases against big names(Mark Cuban, Martha Stewart — I'm not saying they didn't violate securities laws, but that their transgressions pale in comparison to these actions).

    These may be cynically viewed as PR efforts designed to boost public confidence in the markets, and I see little to dissuade me from that view.

    I don't doubt that the SEC is starved for resources. But if these limited resources were focused on important violations rather than such PR stunts — recognizing fully that it's much easier and cheaper to prosecute these transgressions — I would be more sympathetic to the complaints.

    The SEC really hasn't done their job. And a land grab by the Fed, as an *ahem* arbitrary example, would be arguably worse.

    We just have a thoroughly broken regulatory system, which means the problems are probably cultural rather than specific to any one regulator, which means they are commensurately much, much harder to fix.

    I don't see meaningful regulation in the U.S. for a very, very long time to come.

  30. theadr

    Let's not play stupid here. We all know that Paulson threatened the CEO of BOA with firing in order to force the deal down his throat. Why didn't Paulson force GS to take Merrill, instead?

  31. tom a taxpayer

    Will Judge Rakoff be another Judge Sirica?…another Time magazine Man of the Year?

    Here ye, Here ye! Law and order in the court! The Honorable Judge Jed Rakoff presiding!

    "John Joseph Sirica (March 19, 1904–August 14, 1992) was the Chief Judge for the United States District Court for the District of Columbia, where he became famous for his role as the chief judge presiding over the Watergate scandal. He rose to national prominence during the Watergate scandal when he demanded that President Richard Nixon turn over his recordings of White House conversations."

    "Sirica's involvement in the case began when he presided over the trial of the Watergate burglars. He did not believe the claim that they had acted alone, and persuaded or coerced them to implicate the men who had arranged the break-in. For his role in Watergate the judge was named TIME magazine's Man of the Year in 1973."


    I hope this is the first of many Wall Street cases that the good Judge Rakoff will preside over. I hope that Judge Rakoff, like Judge Sirica, will follow the trail and unravel the criminal enterprise that is gravely damaging the Nation. Godspeed Judge Rakoff!

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