Judge Rakoff Rejects Bank of America-Merrill Settlement, Orders Trial

Oooh, this is turning out to be fun. Judge Jed Rakoff is not putting up with Wall Street business as usual (no joke, that was part of the defense offered by Bank of America for its failure to disclose the amount of Merrill bonus payments in the merger proxy sent to shareholders to approve the deal: “of course, everyone knows people on Wall Street get bonuses”) and SEC lack of spine.

The judge want the real perps, the executives who failed to make the disclosure, to have their conduct examined and have fines levied on them. How novel! Calling for the top brass to be responsible for their actions!

From the Wall Street Journal:

In an order issued Monday, Judge Rakoff acknowledged the public interest in settling disputes rather than having them go to trial. Nonetheless, he wrote, “even upon applying the most deferential standard of review,” he was “forced to conclude that the proposed consent judgment is neither fair, nor reasonable, nor adequate” to protect the public interest.

In effect, Judge Rakoff found, the settlement would force the victims of the alleged misstatements–Bank of America shareholders–to pay an additional $33 million.

“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 judge wrote.

The judge has noted that SEC policy directs that culpable executives be punished for misleading shareholders, something the commission had not sought in this case.

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  1. Tesla

    I’m still at a complete loss as to why the SEC requires that a judge coerce them into doing their job.

    That aside, Yves, given that you had previously opined that the SEC doesn’t have the resources to bring anyone to trial (ok, those weren’t your exact words, but close enough), what happens now? Does every other company now know that the SEC can’t investigate them, so they can go do whatever they want? Does the SEC need to go beg for more money? Do they just dro the case?

  2. bsjo

    The SEC has clearly been complicit throughout the investigation. I would think we need to hire a special prosecutor as I suspect we will find SEC misconduct in this effort.

  3. moslof

    Government agencies are nothing but enablers of crony capitalism. Other than lying, and producing voluminous reports that are read by nobody, they do absolutely nothing for their larger than average salaries and benefits. My observation is based on 25 years of experience with government contractors.

  4. holomorphic


    If you do a good enough job at the SEC you will thereafter
    be rewarded with a nice job in the finance industry.

  5. DoctoRx

    I continue to hold out the faint hope that we will have a Watergate-type breakthrough that exposes the inner workings of the various maneuvers the powers-that-were and that be.

    Judge Rakoff = Judge Sirica?

  6. Edwardo

    There’s only one way that satisfaction will be achieved with respect to redressing the massive corruption that has transpired over the last (not so) little while.

    Change the personnel in the Federal Legislature and do it completely. Once that herculean task is achieved, the other necessary tasks will be relatively easy to dispense with. Those others tasks involve campaign finance reform such that any and all loopholes are closed. More importantly, because it would undermine the need for so much “campaign finance”, shorten the election season for The House and Senate drastically. Do the same for Presidential contests so that they begin and end in no more than six months, tops. Have the campaigns paid for by the public.

    Finally, enact term limits.

    You want change, that will be just the ticket. Anything else won’t do the job. Anything else is nothing but a hand wringing waste of time.

  7. DownSouth

    I thought the NY Times’ coverage was much better than that of the Wall Street Journal.

    Take this passage from the ruling, for instance:

    “It is quite something else for the very management that is accused of having lied to its shareholders to determine how much of those victims’ money should be used to make the case against the management go away,” the judge wrote….

    The proposed settlement, the judge continued, “suggests a rather cynical relationship between the parties: the S.E.C. 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.”


    I’ve already called the judge’s court clerk and told him that the judge is my hero.

  8. Steve

    The judge obviously lacks the financial sophistication to understand that hosing the taxpayers to pay bonuses to failed bankers is in everyone’s best interest. The implied criticism of the SEC seems to imply that they are some sort of government agency or something. I’m shocked!

  9. Siggy

    Gotta love Judge Rakoff. Neither Merrill nor B of A achieved results that warrant the payment of bonuses.

    Buried in these shenanigans is the fact that Lewis was coerced, that he did fail to advise the shareholders and ultimately it will be learned that the bonuses are entirely inappropriate.

    Judge Rakoff is pushing the parties towards what could become a criminal investigation if not a prosecution.

  10. Hugh

    This should be the link to Rekoff’s decision up at the NYT:


    It sizzles. Rekoff says explicitly that this deal was structured to allow the SEC to claim a victory and for BAC to complain that it had been unfairly treated when in fact the SEC had not done its job going after those responsible at BAC or their lawyers for the lies. And that shareholders (and US taxpayers), the victims were being revictimized by having to pay the $33 million penalty. Even though the sum was not commensurate with the misdeed, Rakoff did not see why it should be inflicted on shareholders. He also noted that BAC’s consent not to lie to its shareholders in the future was meaningless because BAC had not admitted to lying in the present case. So there was no undertaking not to do what in fact they had done.

    A final note is that this was an Obama Administration case. So the screwups in it can be laid at his door. This further undercuts the whole tenor of his admittedly weak tea speech on reform today. With an Obama SEC like this one, can anyone take seriously

  11. Hugh

    With an Obama SEC like this one, can anyone take seriously his commitment to reform? is how that last line should read.

  12. dd

    So what is the end result here?
    SEC files a motion to withdraw the complaint w/o prejudice. BofA does not oppose motion. Rakoff can grant SEC request and allow dismissal w/o prejudice, can dismiss w/prejudice (BofA wins) or deny the request and order discovery and trial. The SEC is not prepared to prove its allegations. I have no doubt that the investigative work was not crisp because if it were then not only would BofA lawyers given investigative testimony but also Paulson, Geithner and Bernanke.
    That’s the real crucible here and Rakoff’s very compelling arguments will not find the Obama Attorney General supporting Motions to Compel depositions by BofA of Paulson, Geithner or Bernanke to establish BofA’s ultimate defense of implied immunity grants/cum coercion which resulted in the known failure to disclose material information as approved by government officials. Fun times.

    1. DownSouth


      You ask what is the end result here.

      The end result is that the judge is acting in a moral way. He made this clear in his judgment when he wrote: “It (the settlement) is not fair, first and foremost, because it does not comport with the most elementary notions of justice and morality.”

      The judge is a deontologist. Immanuel Kant was one of the most prominent leaders of deontology. Amitai Etzioni in The Moral Dimension describes the school of ethics as follows:

      The essence of the deontological position is the notion that actions are morally right when they conform to a relevant principle or duty. (The term deontology is derived from the Greek deon which means binding duty.) Deontology stresses that the moral status of an act should not be judged by its consequences, the way utilitarians do, but by the “intention.” For example, a person who sets out to defame another is acting immorally, whether or not the person succeeeds in actually damaging the one he or she seeks to defame.

      Deontology uses as the criterion for judging the morality of an act, not the ends it aspires to achieve, nor the consequences, but the moral duty it discharges or disregards. Deontologists point out that consequences, the hallmark of utilitarians, often cannot be predicted. Hence, treat others as you seek to be treated–as an end, and not as a means. It is a judgment one must make long before the consequences of one’s act are known…

      Important…is the deontological observation that a major source of the conflict in the self is commitment to discharge one’s duties, and more generally, to act morally. There is more to life than a quest to maximize one’s satisfaction.

  13. Trainwreck

    Let the veil of secrecy in Western business be destroyed. Shareholders should not have to be burdened with piercing the corporate veil when fraud is the issue. Shareholders should have the final say regarding the activities that a company engages in. Pillory the executives that are no more then vulture capitalists.

  14. bb

    even if that $33m comes out of ken’s pocket, it is still money that was shortchanged from the shareholders. either way, the shareholders are stuck with the bill. what is the point of all this posturing?

  15. Jmd

    The problem is that this SEC with Mary Schapiro as Director and Khuzami (of Deutsche Bank) as head of Enforcement is totally in bed with the industry it covers; there is no objectivity nor incentive to investigate – it is completely out of hand. Where are the actions against Cerberus/Fuld/Pequot/Thain – not to mention if the agency really had any cojones – Henry Paulson for phoning Goldman with advance notice of every action he took in the Fall of 2008…or really, against Goldman for trading on it (see, When Genius Fail for precedent of Goldman front-running weak competitors based on inside knowledge).

    This is an interesting blog post from a former SEC official:


    I have heard on fantastic authority that all it took to get a Wells Notice ‘taken care of’ in the last administration was a well-placed partner at Cleary/Simpson/Sullivan to call Linda Thomsen (very nice lady, now a partner at Davis Polk (great firm), should imho probably serve some time). Please look at the phone logs, someone; how many calls from the GCs at Bear, Lehman, Merrill to her office resulted in actions being dropped? Don’t get me wrong, I love to have my back scratched, but the confidence of the investing public has eroded to nearly zilch in the financial markets; I along with millions of others believe that they are being pumped by the Plunge Protection Team. I hope that grandmas and grandpas who were in there this Spring have learned their lessons and get out, and soon.

  16. run75441


    The good Judge Rakoff has certainly forced BofA, Merril, and the SEC into a corner with his pointed questions and the call for a new Civil Hearing. It remains to be seen whether his decision will stand or not. I suspect BofA and Merril will appeal to the 1st Federal District COA. These districts and SCOTUS are pretty pro-business and in all liklihood will decide in favor of BofA. My one friend who assisted me in a search for a book attornwy seems to think it could be one time they might say “no – go to trial” as the public is pretty angry. I would love to see it go farther; but, I do not believe it will.

    A great series of articles . . .


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