Corporate Governance

SEC v. BofA: Judge Rakoff Rejects the Settlement (part 2)

By J. Robert Brown

Judge Rakoff's concern were two fold.  First, was his concern with the Commission's side of things, centering on the decision to charge the Bank but not any responsible individuals.  He did not buy the Commission's justification for imposing the penalty on Bank of America.  As Judge Rakoff noted:    

• But the S.E.C. argues that this is justified because '[a] corporate penalty ... sends a strong signal to shareholders that unsatisfactory corporate conduct has occurred and allows shareholders to better assess the quality and performance of management.' Id. This hypothesis, however, makes no sense when applied to the facts here: for 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, need to lose another $33 million of their money in order to 'better assess the quality and performance of management' is absurd. 

The conclusion was harsh and unfair.  It is true that Bank of America took a bath during the financial crisis and likely suffered from the acquisition of Merrill Lynch (although it remains to be seen, as the market recovers and brokerage activity picks up, whether this will be a short term harm).  

But the idea that shareholders who have already suffered ought not to suffer more through the imposition of a corporate penalty would result in the elimination of all corporate penalties for suffering companies.  The penalty is designed as a deterrent to future wrongs.  There is nothing in this case that conflicts with this goal. 

Having said that, the real problem was an inadequate explanation of why the Commission was not charging individuals in connection with the settlement. 

Full post as published by The Race to the Bottom on September 15, 2009 (boomark / email).