Corporate Governance

SEC v. BofA: A Settlement (Part 2)

By J. Robert Brown

So will Judge Rakoff approve the settlement?  Most likely he will.

First, of course, it is, to some degree, a clear victory for the judge.  He rejected a $33 million dollar settlement that did not address the failure to disclose the mounting losses by Merrill in connection with shareholder approval of the acquisition.  Moreover, the original settlement harmed existing shareholders by imposing a penalty without providing them with any benefits.  This settlement not only involves a substantially increased penalty ($150 million) but contains corporate governance provisions that ought to benefit existing shareholders.  It is a much improved deal.

Second, Bank of America strenuously argued that it had done absolutely nothing wrong in connection with the first settlement.  The settlement therefore looked like government extortion, the price Bank of America had to pay for getting rid of an overbearing government.   BofA has not admitted the allegations in the settlement (it merely acknowledged "having been served with the Amended Complaint", entered a general appearance and "admits the Court's jurisdiction over it and over the subject matter of the
Actions.").  Nonetheless, the rougher settlement provides greater assurance that the matter was resolved on the merits and not as a result of government coercion.

Third, the failure of the SEC to address the losses by Merrill Lynch in the first case (the complaint only involved issues around the representation that the bank had not approved the bonuses for Merrill when, it was alleged, they in fact had) and the confusion of the reliance on counsel argument suggested that the Agency had not been thorough in its investigation, lending credence to the suggestion by BofA that this case was best explained through government coercion.  The SEC has now added in claims about the losses and conducted extensive discovery, including taking depositions of officers and lawyers involved in the matter.  The increased thoroughness provides greater assurance that the matter is being decided on the merits and is not a product of government coercion. 

In rejecting the first settlement, Judge Rakoff indicated a number of concerns, including the failure to charge individuals.  While the Judge may be disappointed in this failure (although the individuals have now been charged by the New York Attorney General), it will not be enough to stop the settlement.  The SEC provided its reasons for not charging the individuals and, given the greater effort and thoroughness of the Agency, not to mention the depositions taken of counsel, the Judge will not hold up the settlement on this basis. 

Full post as published by The Race to the Bottom on February 04, 2010 (boomark / email).