“Contrived Facade of Enforcement”: Judge Rips SEC Over BofA Settlement

by Kurt Schulzke on September 15, 2009

Earlier this year, I shared misgivings of other commentators that Mary Schapiro’s tenure at FINRA rendered her too conflicted to Chair the SEC.  Judge Rakoff’s scathing September 14 order in SEC v. Bank of America adds weight to the argument.  Judge Rakoff rejected the SEC’s settlement, ordering the parties to prepare for trial on February 1.

The judge’s order shines light on the SEC’s “prosecution” of the case.  First, the SEC actually planned to take an additional $33 million fine from Bank of America (and, therefore, its shareholders) to “punish” the Bank’s management for allegedly lying in proxy solicitations to those same shareholders about the bonuses to be paid to Merrill execs pursuant to the merger.  In other words, in SEC’s distorted view of reality, the best remedy for management theft is SEC theft.

Second, the SEC apparently violated its own policy manual in declining to prosecute the attorneys who Bank of America insists were responsible for the alleged misstatements in the first place.

This is all very strange behavior for a regulatory agency supposedly working hard to repair its reputation in the aftermath of the Madoff scandal.  I differentiate here between the scandal (that the SEC took so long to discover Madoff’s Ponzi) and the Ponzi itself. Some of the most compelling language from Rakoff’s order appears below.

In the Complaint in this case, filed August 3, 2009, the Securities and Exchange Commission (“S.E.C.”) alleges, in stark terms, that defendant Bank of America Corporation materially lied to its shareholders in the proxy statement of November 3, 2008 that solicited the shareholders’ approval of the $50 billion acquisition of Merrill Lynch & Co. (“Merrill”). The essence of the lie … was that Bank of America “represented that Merrill had agreed not to pay year-end performance bonuses or other discretionary incentive compensation to its executives prior to the closing of the merger without Bank of America’s consent [when] [i]n fact, contrary to the representation …, Bank of America had agreed that Merrill could pay up to $5.8 billion –- nearly 12% of the total consideration to be exchanged in the merger ….

Overall … the parties’ submissions … leave the distinct impression that the proposed Consent Judgment was a contrivance designed to provide the S.E.C. with the facade of enforcement and the management of the Bank with a quick resolution of an embarrassing inquiry – all at the expense of the sole alleged victims, the shareholders….

Nor is the proposed Consent Judgment reasonable. Obviously, a proposal that asks the victims to pay a fine for their having been victimized is, for all the reasons already given, as unreasonable as it is unfair. But the proposed Consent Judgment is unreasonable in numerous other respects as well. For example, the Consent Judgment would effectively close the case without the S.E.C. adequately accounting for why, in contravention of its own policy … it did not pursue charges against either Bank management or the lawyers who allegedly were responsible for the false and misleading proxy statements.

The entire order is well worth a read for those with securities-law mindset. Are the SEC’s “enforcers” so accustomed to playing this kind of game that they never expected a judge to object? In a case with this kind of profile, wouldn’t you expect Mary Schapiro to weigh in? Is Schapiro the proverbial fox guarding the hen house?