On December 5, 2008, Bank of America shareholders voted to approve a merger with the ailing Merrill Lynch. What both companies neglected to reveal was that, just prior to the merger, Merrill Lynch paid out $3.6 billion in bonuses. The Securities and Exchange Commission stepped in, claiming that Bank of America "materially lied" to its shareholders.
Bank of America agreed to settle with the SEC for a fine of $33 million. The settlement had to be approved by a federal district judge. No one anticipated a problem - Bank of America agreed to pay; the SEC agreed to the amount. All that was needed was the court's stamp of approval. But neither Bank of America nor the SEC anticipated Judge Jed S. Rakoff.
Today Judge Rakoff rejected the settlement, stating that "the proposed consent judgment is neither fair, nor reasonable, nor adequate" to protect the public interest. Judge Rakoff understood that Bank of America's shareholders would be the ones to pay the fine.Yet these are the same shareholders who were allegedly damage by the lack of disclosure! He writes that the settlement "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."
He also takes the SEC to task for agreeing to such a settlement. The proposed settlement “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 case will now go to trial. I can only hope the trial judge is as concerned about the "Average Joe" as Judge Rakoff.