Finally a judge has dared say no to the once-venerable Securities and Exchange Commission and one of its cozy corporate settlements.
If that wasn’t novel enough, this fellow first had the nerve to ask the SEC a bunch of questions about the way it does its business. Turns out, he got a lot of embarrassing answers about the government’s investigation of Bank of America Corp. that the SEC hadn’t planned to tell the rest of us about.
This jurist gone wild, now a folk hero of sorts, is U.S. District Judge Jed Rakoff. But before we go further, let me tell you a quick story about another judge, this one at the U.S. District Court in Hartford, Conn.
His name is Robert Chatigny. On Aug. 4, he was assigned a settled complaint the SEC filed that day against General Electric Co. Under the deal, GE agreed to pay $50 million of its shareholders’ money to resolve the agency’s claims that it had committed accounting fraud. The SEC didn’t name any actual people as defendants. We don’t know if it ever will. Chatigny approved the agreement six days later, with no hearing and no questions asked. GE neither admitted nor denied the allegations.
That’s how SEC cases usually go. And just think how much more we the public – and certainly GE shareholders – deserve to know about this supposed fraud. Who at the company committed it? Why hasn’t the SEC sued them? Doesn’t the SEC know who they are? Why aren’t they paying fines out of their own pockets? And why wasn’t Chatigny asking these kinds of questions?
I tried calling Chatigny to ask him. His law clerk said he couldn’t be reached for comment.
It seems our man Rakoff is a different kind of judge. He has the SEC and Bank of America in an awful spot.
One day before the GE suit, the SEC filed its $33 million settlement agreement with Bank of America in Rakoff’s court. The SEC’s complaint said the company had lied to its shareholders in the proxy statement it filed seeking their approval to buy Merrill Lynch & Co. The proxy said Merrill had agreed not to pay year-end bonuses to its executives without Bank of America’s consent. What it didn’t say was that Bank of America already had approved bonuses at Merrill of as much as $5.8 billion.
Who were the people who did this lying? When Rakoff asked the question, the SEC said it didn’t know and had concluded it didn’t have enough evidence to pursue claims against any individuals. For its part, Bank of America said it hadn’t lied at all and agreed to pay up just to make the SEC go away. Rakoff knew a rat when he smelled one.
The settlement was “neither fair, nor reasonable, nor adequate,” he said in a Sept. 14 order. The parties were proposing that the company pay $33 million of its shareholders’ money to settle allegations in which the shareholders supposedly were the victims. This, he noted, was at a bank that had taken about $40 billion of taxpayer bailout funds. He told the parties to be ready to go to trial on Feb. 1. (Somehow I suspect this will not happen.)
The part that bugs me most about all this is what the SEC didn’t tell the public from the get-go.
In its Aug. 3 press release announcing the settlement, under the headline “SEC Charges Bank of America for Failing to Disclose Merrill Lynch Bonus Payments,” the SEC waxed on for about 450 words with all sorts of details showing how tough it had been. It concluded with this ominous sentence: “The SEC’s investigation is ongoing.”
I remember reading that line the day the release came out and thinking it left open the possibility the SEC would go after some real people later on over these same allegations. By all outward appearances, the only thing the SEC was focusing on was the failure to disclose these bonus payments. We now know from the SEC’s responses to Rakoff that the commission already had decided not to sue any individuals or file additional claims against the company.
Perhaps the scope of the SEC probe encompasses other stuff related to the Merrill deal, in which case that last line in the press release might have been accurate, albeit misleading to a lay reader. When I asked an SEC spokesman, John Heine, to explain what the SEC meant when it said its investigation was ongoing, he declined to comment.
In any event, I, for one, feel misled. Had Rakoff rubber-stamped this deal and not asked questions, the SEC would have been perfectly content to leave the public with the impression that it still might pursue the people responsible for these alleged violations, when actually this part of the SEC’s probe was over and done with.
Nor can I understand why more judges – such as Chatigny in GE’s case – don’t ask the SEC the kinds of probing questions Rakoff did. While the courts historically have treated the SEC with great deference, it no longer should command the same respect. Just ask anyone who lost money with Bernie Madoff.
And what now? While the SEC could appeal, New York Attorney General Andrew Cuomo has his own investigation in the works. He says he may sue some senior Bank of America executives, personally, over alleged disclosure lapses the SEC never has identified publicly.
Probably the best thing the SEC can do is just walk away.