Judge Rejects Settlement Over Merrill Bonuses
New York Times
September 15, 2009
As President Obama traveled to Wall Street on Monday and chided bankers for their recklessness, across town a federal judge issued a far sharper rebuke, not just for some of the financiers but for their regulators in Washington as well.
Giving voice to the anger and frustration of many ordinary Americans, Judge Jed S. Rakoff issued a scathing ruling on one of the watershed moments of the financial crisis: the star-crossed takeover of Merrill Lynch by the now-struggling Bank of America.
Judge Rakoff refused to approve a $33 million deal that would have settled a lawsuit filed by the Securities and Exchange Commission against the Bank of America. The lawsuit alleged that the bank failed to adequately disclose the bonuses that were paid by Merrill before the merger, which was completed in January at regulators behest as Merrill foundered.
He accused the S.E.C. of failing in its role as Wall Streets top cop by going too easy on one of the biggest banks it regulates. And he accused executives of the Bank of America of failing to take responsibility for actions that blindsided its shareholders and the taxpayers who bailed out the bank at the height of the crisis.
The sharply worded ruling, which invoked justice and morality, seemed to speak not only to the controversial deal, but also to the anger across the nation over the excesses that led to the financial crisis, and the lax regulation in Washington that permitted those excesses to flourish.
Implicit in the judges remarks were broader questions on the anniversary of one of the most tumultuous weeks in Wall Streets history: What do the giants of finance owe their shareholders and the investing public? And who will adequately oversee these behemoths?
Congress is pondering these issues as it prepares to reshape the power structure of financial regulators in Washington, including the S.E.C. President Obama is pushing lawmakers to pass tougher regulations this year that would touch everything from bonuses to the structural soundness of Wall Streets most powerful banks, even as some Democrats fret that the health care debate makes it unlikely that financial reform can be achieved.
We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis, Mr. Obama said in his speech before several hundred banking executives, lawmakers and Mayor Michael R. Bloomberg of New York.
Such consequences were at the heart of the dispute that came before Judge Rakoff, who had demanded that the S.E.C. and the bank explain which executives were responsible for failing to tell the banks shareholders about the payout of Merrills bonuses. That information, together with evidence of large undisclosed losses at Merrill, may have led shareholders to reject the merger at a time when the government wanted to forestall a worse meltdown of the financial system.
The judge accused Bank of America and the S.E.C. of concocting the settlement to effectively absolve themselves of further responsibility.
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, he wrote, and the Banks management gets to claim that they have been coerced into an onerous settlement by overzealous regulators.
The ruling echoes a long-standing criticism that the S.E.C. has largely failed to prosecute cases against corporate executives, opting for quick settlements in which companies themselves are penalized instead of their leaders.
It comes as the agency, under its new leader, Mary L. Schapiro, is struggling to revive its reputation as an effective watchdog of Wall Street after presiding over a near-collapse of the financial markets and failing to catch the $65 billion Ponzi scheme run by Bernard L. Madoff.
Judge Rakoff called the $33 million settlement unfair and inadequate, and ordered Bank of America and the S.E.C. to prepare for a possible trial that would begin by Feb. 1.
Both the bank and the S.E.C. said they disagreed with the judges decision and were evaluating their legal options. Experts said the S.E.C. could decide to appeal the case to a higher court or drop the charges altogether instead of going to trial, but they said the agency was unlikely to exercise those options. Some analysts argued the case itself was irrelevant given that Bank of Americas takeover of Merrill had increased the banks profits, resulting in a surge in its stock price.
The deal also saved Merrill from impending collapse and arguably prevented a greater financial calamity from unfolding in the immediate aftermath of the Lehman Brothers bankruptcy.
Im having a difficult time understanding who was harmed here, said Richard X. Bove, a banking analyst with Rochdale Securities. Why is this company being put into court over a series of events that benefited the nation, its economy, its financial system, the shareholders of Bank of America and the bank itself.
In forcing the two sides to argue their case in court, Judge Rakoff hopes to expose the truth about whether Bank of America lied to shareholders.
Its a strong, blistering decision, said John C. Coffee, a Columbia Law School professor who has taught a course along with Judge Rakoff for 21 years. It is really a critique, not just of this case, but of a long-standing practice at the S.E.C., which effectively allowed corporate managers to buy immunity with their shareholders money.
Judge Rakoff focused much of his criticism on the fact that the fine in the case would be paid by the banks shareholders.
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, Judge Rakoff wrote.
The case is one of several investigations into the banks $50 billion deal with Merrill. Andrew M. Cuomo, the attorney general of New York, is also investigating the disclosures of bonuses and Merrills losses last year.
Mr. Cuomo plans to file a complaint charging individuals at Bank of America in the next two weeks, according to a person briefed on the investigation.
The House Committee on Government Oversight and Reform is also looking into the merger.
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