The SEC-BofA Circus

"Beware of regulators bearing the gift of quick settlements, especially amid a populist stampede. That seems to be the healthy attitude of Judge Jed Rakoff to the recent SEC fine against [BofA] for handing out unpopular bonuses. ... This tale begins in the panicked days of last year's financial crisis. ... Enter new SEC chief Mary Schapiro, who has used the episode to signal a new era of supposedly get-tough enforcement. The SEC brought a civil lawsuit, alleging that BofA had misled inveastors by failing to disclose the bonuses in the proxy documents it sent to shareholders. ... In pursuing BofA, Ms. Schapiro broke with the SEC's policy of pursuing individuals, rather than companies, in cases of alleged fraud against investors. ... Next enter Judge Rakoff, a Clinton appointee, who the SEC expected would rubber stamp the deal. But the judge has proven to be skeptical of the SEC's case. The judge first asked why behavior that the SEC considered so egregious merited a fine of merely $33 million. ... The SEC's defense is that it would be too difficult to go after BofA management, since individuals will claim their decisions were advised by corporate lawyers and are protected by attorney-client privilege. ... Then again, perhaps the real reason the SEC is reluctant to go after individuals is because, regarding the BofA, all roads lead back to the federal government. ... Buried within a brief filed recently to Judge Rakoff, the SEC included the bombshell detail that BofA had in fact supplied the Fed and Treasury with a financial document that included information about the bonuses. ... If the Fed and Treasury were fine with these payouts, and didn't demand their discliosure, pehaps Messers. Paulson and Bernanke should be the parties in the SEC dock", my emphasis, Editorial at the WSJ, 5 September 2009, link: http://online.wsj.com/article/SB10001424052970204731804574387044194076168.html.

"The letter on Tuesday from David A. Markowitz, the chief of Mr. Cuomo's Investor Protection Bureau, said that 'attorney-client privilege is hindering this office's ability to make fair and fully informed decisions as to what charges, if any, to bring and whether individual [BofA] officers should be charged.' in its response, [BofA] disputed that assertion on several fronts, writing that 'because [BofA] did not violate the law, it has not offered reliance on legal advice as a defense'," Zachery Kouwe at the NYT, 10 September 2009, link: http://www.nytimes.com/2009/09/10/business/10bank.html.

"A federal judge threw out the [SEC's] proposed settlement with [BofA] over its disclosure of controversial bonuses paid to Merrill Lynch [ML] employees, in an unusual ruling that casts doubt about how the agency handles probes of major US companies. ... The Rakoff ruling undermines one of the most high-profile cases against alleged corporate wrongdoing conducted under SEC chief Mary Schapiro, who took the job in January. It puts new pressure on the agency to show it is fighting for investors in the wake of the controversy over its policing of the financial industry during the Wall Street boom and its failure to catch Bernard Madoff's massive fraud despite several red flags. ... In a rare scuttling of an SEC settlement, Judge Rakoff said the $33 million fine levied on [BofA] 'does not comport with the most elementary notions of justice and morality' because the company's shareholders--the victims of the alleged misconduct--are the same people being asked to pay the fine. He set a trial date for Feb. 1. ... Securities lawyers said they couldn't recall such a high-profile case being forced into a trial after the government and a company agreed to a settlement. In his ruling, Judge Rakoff often wrote that if bank executives in fact relied on legal counsel in crafting the proxy language, 'why are the penalties not then sought from the lawyers?' ... SEC spokesman John Nester said Monday the settlement, ... 'properly balanced all of the relevant considerations.' ... Wachtell, Lipton, Rosen & Katz, which represented [BofA], declined to comment. A lawyer for Shearman & Sterling, which represented [ML], declined to comment", my emphasis, Kara Scannell, Liz Rappaport & Jess Bravin at the WSJ, 15 September 2009, link: http://online.wsj.com/article/SB125294493976909051.html.

"'If the Bank is innocent of lying to its shareholders, why is it prepared to pay $33 million of its shareholders' money as a penalty for lying to them?' On this point, we think the judge is soft-pedaling the coercive nature of regulatory prosecution. ... Given all the dirty laundry already aired about this deal, including claims that [Fed] Chairman Ben Benrnake and former Treasury Secretary Hank Paulson forced a reluctant BofA to conclude its Merrill purhase, it's not surprising if the BofA was willing to pay for it to go away", Editorial at the WSJ, 15 September 2009, link: http://online.wsj.com/article/SB10001424052970203917304574413242609077958.html.

"With one rebuke from a federal judge, the [SEC's] tool for regulating financial markets and protecting investors faces daunting questions. Legal experts said Monday's rejection by US District Judge Jed. S. Rakoff of the agency's proposed $33 million settlement with [BofA] Corp. could bring tougher scrutiny of other settlements over alleged wrongdoing. For decades, the SEC has resolved more than 90% of its investigations through settlements, lawyers estimate. Defendants neither admit nor deny wrongdoing, and judges sign off on the deal with little scrutiny. In the process, government officials get to send a message of deterrence without blowing their enforcement budget, which could happen if too many cases went to trial. ... Other legal scholars noted that the judge undercut the derterrence message the SEC intended to deliver, suggesting that the proposed penalty was too light", my emphasis, Kara Scannell at the WSJ, 16 September 2009, link: http://online.wsj.com/article/SB125305845632913893.html.

"New York's attorney general, Andrew Cuomo, ramping up his investigation of Merrill Lynch's purchase by [BofA], issued subpoenas to the five directors on the bank's audit committee at the time fo the deal, according to people familiar with the situation. ... In a comment Wednesday, Mr. Cuomo said he wonders broadly where the boards were in this financial crisis, and whether BofA directors 'protected the rights of shareholders, were they misled, or were they little more than rubber stamps for management's decision-making?' ... 'Subpoenas by an attorney general of outside directors [are] quite unusual' for any reason, said Charles Elsdon, head of the Weinberg Center for Corporate Governance at the University of Delaware's business school", Liz Rappaport, Dan Fitzpatrick and Joann Lublin at the WSJ, 17 September 2009, link: http://online.wsj.com/article/SB125312111880316599.html.

Get tough enforcement? Against whom? The Feds encouraged the BofA to violate securities law? Never. The SEC's case stinks.

Did the SEC violate New York Law?

I'm sure Nester is right. What were the "considerations"? A managing directorship at say GSG, four New York BigLaw partnerships, and what else Nester? Who says the SEC can't be bought? We remember Nester. He appears in my 23 October 2008 post: http://skepticaltexascpa.blogspot.com/2008/10/who-is-stephen-cutler-2.html.

Would the BofA pay $33 million to stay in Zimbabwe Ben's good graces? It's peanuts. Through interest rate suppression, the BofA gets much more than $33 million a year from the Fed.

The SEC's "biggest tool" is as threatening as Monty Python's "comfy chair" wielded by the Spanish Inquisition. Consent decrees are an SEC tool. To protect miscreants, not investors. For decades I have advocated the SEC be deprived of this tool. The message the SEC sends with these settlements is: it can be bought off. Cheaply with big jobs to SEC enforcement personnel.

Will Cuomo's inveastigation lead to ZB and Henry Paulson? If not, what's he doing? IS the FBI looking to "Spitzer" Cuomo? Stay tuned.