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Monday, September 14, 2009

Federal Judge: SEC Put Self-Aggrandizement First, Shareholder Protection Last

The distinguished federal judge Jed Rakoff, sitting in the Southern District of New York, strongly rebuked the Securities and Exchange Commission over its negotiations with the Bank of America to settle civil allegations filed by the SEC stemming from BoA's acquisition of the then-troubled Merrill Lynch in December 2008 and the alleged failure to adequately disclose to BoA shareholders the terms of the acquisition and the financial state of Merrill Lynch.

Read Judge Rakoff's decision here.

Regarding the proposed agreement Rakoff rejected, he minced no words in writing (page 4) that the proposed agreement "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 missconduct."  Rakoff further blasted the parties, writing that "the 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 [Merrill], need to lose another $33 million of their money in order to 'better assess the quality and performance of management' is absurd." (Page 4.)

If Judge Rakoff's characterization and analysis is correct, the SEC's judgment will fall under even greater scrutiny and the calls for the SEC's dismantling (as an overhaul may not be sufficient) will likely increase.  

It is hard to see how such payments as provided for in the settlement were to benefit shareholders.  While such financial arrangements are common to settle class actions on behalf of the shareholder class, Judge Rakoff distinguishes the BoA-SEC settlement as anything but the proper exercise by management of its business judgment, writing at page 7:
“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.”

It almost makes you question the basic premise that the SEC's primary objectives are to protect shareholders and seek redress for them wherever possible.    The judge's implication is that the settlement was a sweetheart deal.   Perhaps career aspirations were at play here...and this would not be the first time that government lawyers were suspected of doing that.    In fact, such allegations are commonly made in connection with criticisms that the SEC has often chosen small brokerage firms and individual brokers as enforcement targets, instead of the "titans of industry."   Like Bernard Madoff.

The SEC's credibility is not just under fire; its very legitimacy as an enforcement agency is now suspect.   And the legions of Madoff victims are going to be saying, "we told you so."

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