I'm surprised to see that no one has diaried about yesterday's rejection of a settlement between Bank of America and the SEC, which delivers the parties -- and BoA in particular -- such a devastating, guffaw-inducing smackdown that it shouldn't be missed.
The nut of the case is that BoA allegedly lied to its stockholders about whether Merrill Lynch executives would be paid bonuses after BoA took over the collapsing firm. Apparently, the SEC's filing of the case was accompanied by a settlement offer, in which, according to the decision, "Bank of America, without admitting or denying the accusations, would be enjoined from making future false statements in proxy solicitations and would pay to the S.E.C. a fine of $33 million." Whereupon Judge Jed S. Rakoff of the U.S. District Court, Southern District of New York, delivers his first deliciously forthright assessment of the matters at hand:
In other words, 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.
Judge Rakoff (are District Court judges called "Judge" or "Justice"?) then rejects the settlement as "neither fair, nor reasonable, nor adequate," offering as his first argument that "it does not comport with the most elementary notions of justice and morality, in that it proposes that the shareholders who were the victims ofthe Bank’s alleged misconduct now pay the penalty for that misconduct."
[T]he notion that Bank of America shareholders, having been lied to blatantly in connection with the multi-billion-dollar purchase of a huge, nearly-bankrupt company, need to lose another $33 million of their money in order to “better assess the quality and performance of management” is absurd.
Some more choice morsels:
Moreover, it is noteworthy that, in all its voluminous papers protesting its innocence, Bank of America never actually provides the Court with the particularized facts that the Court requested, such as precisely how the proxy statement came to be prepared, exactly who made the relevant decisions as to what to include and not include so far as the Merrill bonuses were concerned, etc.
But all of this is beside the point because, if the Bank is innocent of lying to its shareholders, why is it prepared to pay $33 million of its shareholders’ money as a penalty for lying to them?
It is one thing for management to exercise its business judgment to determine how much of its shareholders’ money should be used to settle a case brought by former shareholders or third parties. 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.
Overall, indeed, the parties’ submissions, when carefully read, leave the distinct impression that the proposed Consent Judgment was a contrivance designed to provide the S.E.C. with the facade of enforcement and the management of the Bank with a quick resolution of an embarrassing inquiry – all at the expense of the sole alleged victims, the shareholders. Even under the most deferential review, this proposed Consent Judgment cannot remotely be called fair.
Our learned judge even displays a literary streak:
Oscar Wilde once famously said that a cynic is someone “who knows the price of everything and the value of nothing.” Oscar Wilde, Lady Windermere’s Fan (1892). The proposed Consent Judgment in this case 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.
The judge takes a few shots at the SEC as well, which I'll leave the reader to discover.
Justice was done this day -- both prosaic and poetic.