Saturday, September 19, 2009


On September 14, 2009, a phenomenal and extraordinary thing happened: A judge took a courageous stand in the face of enormous pressure, deciding to reject a proposed settlement, and looked out for and vindicated the rights of shareholders and taxpayers alike. Generally, where parties to a civil lawsuit agree to a mutual settlement, in most cases, judges merely rubber stamp those settlement agreements and dismiss the case and move on to the next cases on their overwhelming dockets.

On August 3, 2009, the Securities and Exchange Commission (“SEC”) filed a civil complaint against Bank of America in the United States District Court for the Southern District of New York. The Complaint alleged that Bank of America materially lied to its shareholders in a November 3, 2008 proxy statement that solicited the shareholders’ approval of the $50 billion acquisition of Merrill Lynch & Co. (“Merrill”). In essence, the Complaint alleges that Bank of America lied to shareholders by representing that Merrill had agreed not to pay year-end performance bonuses and other discretionary incentive compensation to executives prior to closing the agreed upon merger between Bank of America and Merrill without Bank of America’s consent. Indeed, bonuses and other discretionary compensation payments were made that amounted to $5.8 billion, or nearly 12% of the total consideration exchanged in the merger.

Interestingly, however, on the very same day that the SEC’s Complaint was filed, the SEC and Bank of America sought the Court’s approval of a proposed final Consent Judgment. Under the Consent Judgment, Bank of America would not admit or deny the allegations in the Complaint, would be enjoined from making future false statements in proxy solicitations, and would pay the SEC a fine of $33 million. Again, when parties reach an amicable solution to their problems courts defer to the parties’ judgment in most cases. NOT THIS TIME!!! Judge Jed Rakoff said no way. In his September 14, 2009 Memorandum Order he rejected the proposed SEC and Bank of America settlement as neither fair, reasonable, nor adequate. Judge Rakoff’s well-reasoned and considerate Order speaks volumes. Judge Rakoff observed: “In other words, the parties were proposing that the management of Bank of America – having allegedly hidden from the Bank’s shareholders that as much as $5.8 billion of their money would be given as bonuses to the executives of Merrill who had run that company nearly into bankruptcy – would now settle the legal consequences of their lying by paying the S.E.C. $33 million more of their shareholders’ money...This proposal to have the victims of the violation pay an additional penalty for their own victimization was enough to give the Court pause.”

What about vigorous enforcement? Judge Rakoff pointed out that “…the parties’ submission, when carefully read, leave the distinct impression that the proposed Consent Judgment was a contrivance designed to provide the S.E.C. with the façade 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.” Judge Rakoff’s clear displeasure with the SEC’s role as regulatory enforcer did not stop here. Later in his Order, Judge Rakoff observes:

“Oscar Wilde once famously said that a cynic is someone “who knows the price of everything and the value of nothing.” Oscar Wilde, Lady Windermere’s Fan (1892). The proposed
Consent Judgment in this case suggests a rather cynical relationship between the parties: the
S.E.C. gets to claim that it is exposing wrongdoing on the part of the Bank of America in a
high-profile merger; the Bank’s management gets to claim that they have been coerced into
an onerous settlement by overzealous regulators. And all this is done at the expense, not only
of the shareholders, but also of the truth.”

Did the SEC really pursue the most culpable parties and players in the Bank of America case? No. Interestingly, the SEC chose not to pursue the lawyers and executives at Bank of America responsible for the misrepresentations about Merrill it found offensive in the Bank of America proxy statement. Judge Rakoff’s Order assesses the “advice of counsel” defense and the issue of waiver. It is troubling that the SEC decided to take a pass at pursuing the parties most responsible (i.e. Bank of America’s lawyers and executives).

Judge Rakoff was particularly troubled by Bank of America’s acceptance of TARP funds. Judge Rakoff noted: “Undoubtedly, the decision to spend this money was made even easier by the fact that the U.S. Government provided the Bank of America with a $40 billion or so “bail out,” of which $20 billion came after the merger…To say, as the Bank now does, that the $33 million does not come directly from U.S. funds is simply to ignore the overall economics of the Bank’s situation.” In Judge Rakoff’s mind Bank of America’s initial agreement and willingness to enter into a $33 million settlement constitutes corporate waste.

This is a case that might set a new regulatory tone for the SEC. Further, corporations might now take pulse when trying to quickly settle a matter and make it go away by dangling money in the face of regulatory enforcers. At any rate, I applaud Judge Rakoff for having the courage to call out the questionable regulatory and litigation tactics employed by the SEC, and the actions of Bank of America in connection with the Merrill merger. Finally, shareholders have found a defender and champion in the form of Judge Rakoff. Judge Rakoff shows us courageously that there are no rubber stamps in his courtroom. I think that years from now we will look back at this as a watershed moment when the balance of power began to shift back in the direction of shareholders. Additionally, the earnestness and enforcement vigor of the SEC will be under intense scrutiny moving forward. Only time will tell what impact this case has on the legal landscape.


  1. Professor Grant:

    Thank you for this very informative post. What happens now? Since the settlement was rejected by the judge, what is the next move? Will there be a trial? What do you predict will be the outcome? It appears to me that most of corporate law favors the corporation and NOT the shareholders, so can we expect better from a trial?


  2. Anonymous,

    Thank you for your questions and comments. You pose a wonderful question: What is the next move? Well, Judge Rakoff has set a February 2010 trial date in this matter. In many ways, this calls the bluff of the SEC, and forces the SEC to prove the allegations in the Complaint, if trial is a reality. For the SEC, this means either put up or shut up.

    Whether or not there will be a trial this remains to be seen. This whole incident has to be rather embarassing to the SEC. In light of Judge Rakoff's admonishments, I think that the SEC has to consider and contemplate filing charges (criminal or civil) against the Bank of America directors, upper-level executives, and lawyers involved in preparing the alleged false and misleading proxy statements.

    Honestly, it is hard to predict an outcome in this situation. I don't want to go out on a limb. Either way you slice it, whether through settlement or trial, Bank of America's shareholders will still be injured. I will try to keep you and other readers posted. Again, thank you for your questions and comments.