Calling Bank of America and the SEC to the Carpet

by Jacob Zamansky on August 7th, 2009 at 12:23 pm : Comments 000

I am pleased to see Judge Jed Rakoff, who’s decision it was not to approve Bank of America’s SEC settlement, shared my disbelief and outrage over the $33 million fine levied against Bank of America for the serious allegation that the bank’s management may have conspired to hide billions of dollars in bonus payments and losses.  This is an important first step, but doesn’t get to the root problem.

As reported, Bank of America’s management team was so concerned about the upcoming shareholder vote to approve the merger with Merrill Lynch, that they decided to withhold the disclosure of $2 billion in losses at Merrill until after shareholders approved the deal.  Bank of America contends the loss was not “material.”  If that weren’t enough, the SEC contended that Bank of America hid from its shareholders the fact that it would pay Merrill Lynch employees up to $5.8 billion in bonuses before the merger closed.

Judge Rakoff made his suspicions clear in his order as he wroteDespite the public importance of this case, the proposed consent judgment would leave uncertain the truth of the very serious allegations made in the complaint,” and that “the proposed consent judgment in no way specifies the basis for the $33 million figure or whether any of this money is derived directly or indirectly from the $20 billion in public funds previously advanced to Bank of America as part of its ‘bailout.’” He will hold an “evidentiary hearing” on Monday.

Judge Rakoff’s order sends an unambiguous warning to the SEC that tougher sanctions are necessary.  I applaud his gumption.

Failure to disclose material information to shareholders is a serious allegation and shouldn’t be brushed aside with an easy settlement.  What will be difficult to comprehend is how the decision to hide the bonus payments and losses came to be.  In all likelihood, Bank of America consulted with outside attorneys, accountants and compensation experts.  Not only does the SEC’s settlement let Bank of America off the hook, it allows those that fueled the fire to get off scott free.

Judge Rakoff’s hearing on Monday will likely force settlement renegotiations and will be a black eye for the SEC.  Hopefully it will make the agency’s enforcement division be more aggressive during settlement negotiations.  Still, the entire system needs to be addressed.

When the SEC forces a corporation to settle, the fines it levies should be felt by a fraud’s perpetrators and those that failed to detect it.  Therefore, instead of fines coming out of shareholder’s equity, it should come directly out of the bonus pool.  And those that advised on decisions which were found to be fraudulent should be held equally accountable.

Judge Rakoff’s decision to reexamine Bank of America’s settlement with the SEC is the right decision.  But we still have a long road ahead to making SEC enforcement actions more of a deterrent.

Filed under Bank of America, Investment Fraud