The banks and brokerages will almost certainly outspend or outlast Obama, so that nothing significant will come from his efforts to reform the "system" of financial regulation. But every now and then in the midst (and mist) of this recurring futility, someone takes a small step that just warms your heart.
In this case, it is Federal District Judge Jed Rakoff, of the Southern District of New York. He disapproved a proposed consent judgment that would have settled an action brought by the Securities Exchange Commission against Bank of America.
The action involved Bank of America's purchase of Merrill Lynch when Merrill Lynch was facing bankruptcy. Bank of America proposed to buy Merrill for $50 billion. It could not complete the deal without its shareholders' approval. In seeking its shareholders' approval, Bank of America told its shareholders that Merrill had agreed not to pay Merrills' executives year-end bonuses. The Securities Exchange Commission alleged that Bank of America had in fact agreed that Merrill would pay its executives what amounted to $5.8 billion in bonuses. The payment of this $5.8 billion meant that Bank of America's shareholders got about than 10 per cent less than they were told they would get for their $50 billion.
Earlier this year, the SEC simultaneously filed in federal court a complaint against Bank of America for lying to its shareholders, and a consent decree that would settle the complaint for payment of $33 million by Bank of America to the SEC.
The judge rejected the settlement and pointed out the following facts:
--The complaint alleged that Bank of America lied to its shareholders. The settlement would have the Bank of America--that is, the shareholders, not the management--pay the government to settle the case. In other words, the shareholders, having been defrauded by their own management to the tune of $5.8 billion, would pay another $33 million to make the government's case go away.
--The government provided the Bank of America with $40 billion in bail-out funds in connection with the purchase. So if it wasn't the shareholders paying the government to protect the allegedly dishonest management, then it was the government paying itself to settle the case it brought.
The Court concludes:
The proposed Consent Judgment suggests a rather cynical relationship between the parties: the SEC get 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 of the truth.
At the end of his order, the judge notes that the Bank of America said that if the judge did not approve the consent judgment, it would litigate the case. He notes that the SEC, having brought the case, presumably will not simply drop it. He orders the parties to get the case ready for trial by February 1, 2010.
Stay tuned.
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