Judge Rejects Bank of America/SEC Settlement, Sets February 1 Trial

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On the day that Lehman Brothers filed for bankruptcy, Bank of America CEO Ken Lewis was sipping champagne with Merrill Lynch CEO John Thain to celebrate the announcement of the marriage of BofA and Merrill Lynch following their whirlwind weekend courtship.

Today a one year anniversary present was delivered from Judge Jed S. Rakoff who rejected the $33 million settlement BofA had agreed to pay the SEC for having “materially lied to its shareholders” by failing to disclose in the merger proxy filing that Merrill Lynch could pay up to $5.8 billion of the $50 billion merger in bonuses and year end compensation to Merrill executives prior to the January 1, 2009 merger. The judge has given BofA and the SEC until September 21 to file with the Court in preparation for a February 1, 2010 trial.

Throughout his Memorandum Order, Judge Rakoff reiterated that his primary reason for rejecting the settlement is that “the notion that Bank of America shareholders, having been lied to blatantly in connection with the multi-billion dollar purchase of a huge, nearly-bankrupt company, need to lose another $33 million of their money…is absurd.”

Unlike most government regulators, economists, and media pundits who believe shareholders should be punished for the bad decisions made by senior management, Judge Rakoff’s ruling shows he clearly understands shareholders are very rarely able to influence management’s decisions. How do shareholders ever really know for sure what the company’s true state of financial health is even if they read SEC documents and press releases and listen to conference calls that convey one thing, only to find out the information was not true? All the while the Federal Reserve and other government regulators remained silent.

Institutional investors (i.e. mutual funds) have the largest influence on corporate management who they will almost always side with in order to retain the company’s 401k plans and other business. Inflicting moral hazard by wiping out shareholders has hurt millions of individual investors while the executives of these failed companies walked away with millions.

In response to Judge Rakoff wanting to know why the SEC deviated from its normal policy “to go after the company executives who were responsible for the lie, rather than innocent shareholders,” the SEC said their investigation pointed to BofA and Merrill lawyers who drafted the shareholder proxy and made the disclosure decisions about paying the bonuses. Judge Rakoff then asked the SEC why they imposed penalties “on the victims of the lie, the shareholders” instead of the lawyers.

And get this: BofA “vigorously asserts that the proxy statement, when read carefully, is neither false nor misleading.” Why? Because the bonus schedule was not attached to the proxy statement! However, BofA stated to Judge Rakoff that even if the proxy was misleading, “the misstatements were immaterial because (it) was widely acknowledged in the period leading up to the shareholder vote that Merrill intended to pay year-end incentive compensation.” Even the SEC found that excuse “hollow” as relying on “media speculation” cannot be equated on the same level as a company’s SEC filings.

Judge Rakoff notes that although BofA provided “voluminous papers protesting its innocence, BofA never actually provides the Court with the particularized facts the Court requested, such as precisely how the proxy statement came to be prepared, exactly who made the relevant decisions as to what to include and not include so far as the Merrill bonuses were concerned, etc.”

Regarding the $33 million settlement, Judge Rakoff writes:
“But all of this is beside the point because, if the Bank is innocent of lying to its shareholders, why is it prepared to pay $33 million of its shareholders’ money as a penalty for lying to them?”

Judge Rakoff acknowledges that BofA’s decision to settle was probably a “business judgment,” but finds it “difficult to believe that litigating this simple case would cost anything like $33 million.” (Obviously BofA wanted to keep one of their regulators happy and get the issue out of the news ASAP!)

In a footnote, Judge Rakoff remarked: “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.” (Remember that BofA told Bernanke and Paulson the bank would walk away from the deal without government assistance to cover Merrill’s projected $20 billion loss.)

In addition to the $33 million fine, the SEC forbids BofA “from issuing false or misleading statements in the future.” Since when should companies EVER lie or conceal information from shareholders?!

Judge Rakoff concludes that “the SEC 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.”

BofA claims they’re ready to litigate, and Judge Rakoff doubts the SEC will drop the charges against BofA. Additionally, various newswires are quoting the Associated Press that New York AG Andrew Cuomo is preparing a belated anniversary gift of civil charges against some of the highest ranking BofA executives. And the House Oversight Committee has not finished its investigation into the secret deal reached between Ken Lewis, Bernanke, and Hank Paulson to ensure the merger took place as planned.

To quote Judge Rakoff, “the truth may still emerge.” Saturn represents the law of cause and effect. On October 29, Saturn will move into Libra, the sign represented by the scales of justice. Saturn will then form a tense alignment to Pluto in Saturn-ruled Capricorn, exposing all kinds of secret arrangements between the government and corporations. The energies of Saturn/Pluto will seek to bring what is unfair, unjust, and out of balance back into equilibrium through digging deep to get to the root cause of the imbalance. As Saturn represents government and Pluto represents people in positions of power, government officials can come under just as much scrutiny as corporate leaders.

Banks will particularly come under scrutiny as Libra is ruled by Venus (banks). At the same time, Saturn and Pluto will form challenging alignments to the USA natal Venus and Jupiter, reflecting that these events could have a big impact on the financial system. The second Saturn/Pluto alignment will exactly occur at the time Judge Rakoff has scheduled the trial. Ken Lewis was already stripped of his BofA Chairmanship in April, and he has seen that both the Bush and Obama Administrations have no compunction removing CEOs. And as I have previously written, Saturn, Pluto and other planetary transits will bring new scrutiny to the Federal Reserve. Bernanke might begin to wish he had not been reappointed.

To quote a favorite expression of Oprah Winfrey, “what I know for sure” is that our judicial system could certainly use more common sense and shareholder friendly judges like Judge Jed S. Rakoff.

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