The Dog Who Ate Ken Lewis’s Homework

by Jacob Zamansky on August 26th, 2009 at 1:46 pm : Comments 000

A wholehearted three cheers for Jed S. Rakoff, the Southern District of New York judge who refuses to rubber stamp the SEC’s  $33 million wrist slap on Bank of America for failing to disclose billions of dollars in bonuses paid by Merrill Lynch just prior to the merger of the two companies.  Judge Rakoff rightfully wants some accountability: In addition to wanting to know who was ultimately responsible for failing to make the disclosure, he also wants an explanation as to how the SEC determined that $33 million was a suitable fine.

Bank of America’s defense in this matter is shameful. The bank claims that the firm’s white shoe lawyers made the decision not to disclose the bonuses and the SEC says it can’t dispute this claim unless Bank of America executives agree to waive their attorney-client privilege, which they aren’t prepared to do.  Adhering to the SEC’s longstanding policy of treating executives at major financial firms with kid gloves, the agency opted to give Bank of America’s executives a pass.  So much for the SEC’s pledge that the agency’s era of “See No Evil, Hear No Evil” is over.

Bank of America’s defense has as much credibility as the proverbial elementary student who argued that he couldn’t finish his assignment because his dog ate his homework.  Rest assured, Bank of America’s attorneys did not make the decision not to disclose the Merrill bonuses.  They most probably rendered an opinion that failing to disclose the bonuses was legally defensible, but their memos were no doubt laden with all sorts of caveats.  That’s likely why Bank of America doesn’t want to waive its attorney-client privilege; the bank’s executives no doubt knew they were skating pretty close to the line, but from a legal perspective, they believed they could get away with it.

One of the primary reasons CEOs get paid the big bucks is supposedly for their judgment.  A responsible and effective leader gathers information from multiple sources and then makes a determination as to the best course of action.  Credible CEOs accept the responsibility that the buck stops with them and don’t allow any constituency, including their company’s attorneys, to make critical decisions.  I strongly suspect that James Burke, the CEO of Johnson and Johnson during the Tylenol tampering scare, was warned about the legal and marketing dangers of voluntarily recalling the product but he opted to do what he thought was the right thing to do.  That’s called leadership.

Mr. Burke said his decision was made in keeping with Johnson & Johnson’s credo that the company’s focus is to do right by its customers.  Bank of America CEO Ken Lewis clearly isn’t driven by any lofty-minded credos; rather, he is a corporate coward who survives by blaming others for his leadership failures.  The competitive strength of any financial services company is the trust it instills, and as long as Ken Lewis remains at the helm, it is beyond me why anyone would trust the management of Bank of America.

Filed under CEOs, SEC, Wall Street