PrefBlog

This is important enough and encouraging enough to deserve its own post.

On August 26 I highlighted Judge Jed Rakoff’s handling of the BAC / MER / SEC conspiracy:

I’m not usually a big fan of bureaucrats, but Jed Rakoff, the US District Judge hearing the SEC / BAC / MER case is saying some unusually sensible things:

U.S. District Judge Jed Rakoff has twice refused to approve the Securities and Exchange Commission’s $33 million settlement over the bank’s failure to better disclose bonuses it had authorized Merrill Lynch & Co, which it was acquiring, to pay.

Rakoff has faulted the SEC for appearing to let the bank off too easily, and dismissed as nonsensical why the bank would agree to pay anything without admitting it had done anything wrong.

Hear, hear, Mr. Rakoff! Regulators are quick to tout their negotiated settlements, but a negotiated settlement without admission of guilt is either a license to cheat or simple regulatory extortion. The politicians who ultimately bear responsibility for the conduct of their regulators should revise legislation such that negotiated settlements are banned.

Not content with saying one sensible thing, Judge Rakoff continued:

In the Bank of America case, executives said they relied on lawyers’ judgments as to what bonus details should be revealed. Yet the bank did not waive attorney-client privilege, meaning the names of the decision makers remained secret. An exasperated Judge Rakoff questioned why the SEC would agree to this.

“If the company does not waive the privilege,” the Manhattan judge wrote, “the culpability of both the corporate officer and the company counsel will remain beyond scrutiny. This seems so at war with common sense.”

The SEC’s position, if it has been reported correctly by Reuters, is nothing short of insane. Everything’s OK as long as you sought legal counsel? This implies that the SEC has out-sourced the interpretation, prosecution and judgement of securities law to any two-bit shyster with a law degree who happens to be consulted. By the SEC’s reasoning, if I put every cent of client money into sub-prime paper and lose the whole whack, I should be able to claim that I consulted the rating agencies and so did nothing wrong!

Where is the responsibility here? Regardless of what was discussed with whom, the fact is that BofA – and BofA’s executives – knew X and disclosed Y. The consultation of legal advisors is irrelevant to the question of whether X is sufficiently close to Y to meet their legal obligations; the consultation is not wholly irrelevant to personal responsibility, but it is merely a detail.

He has now overturned the proposed settlement:

A Federal District judge on Monday overturned a settlement between the Bank of America and the Securities and Exchange Commission over bonuses paid to Merrill Lynch executives just before the bank took over Merrill last year.

The $33 million settlement “does not comport with the most elementary notions of justice and morality,” wrote Jed S. Rakoff, the judge assigned to the case in federal court in Lower Manhattan.

The ruling directed both the agency and the bank to prepare for a possible trial that would begin no later than Feb. 1.
…
The proposed settlement, the judge continued, “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.”

Jed Rakoff for the Supreme Court!

Update: Jim Hamilton’s World of Securities Regulation has summarized the SEC’s position.

Update, 2009-9-17: Bloomberg has published a feature on Rakoff.

Update, 2009-9-18: Felix Salmon posted on August 6:

I hope this sends a clear signal to Mary Schapiro: quiet bilateral settlements with companies should come to an end, and as a rule all companies paying fines should at the same time admit, in public, exactly what they did wrong. All too often companies spin SEC fines as a cost of making legal trouble go away, rather than a real indication that they made a serious mistake. They shouldn’t be allowed to do that.

Mr. Salmon seems to be of the view that all negotiated settlements are instances of actual material wrongdoing … there’s no way of telling, but I’ll bet the proportion is not, in fact, 100.00%.