The federal district judge handling the Bank of America (BAC) deal with the SEC to settle charges that the financial firm improperly disclosed the timing of bonuses paid to Merrill Lynch executives has said he wants to know that whole truth and nothing but the truth about the matter. And, he wants the public to have access to the same information. He has, once again, stopped a $33 million settlement between the parties.

Judge Jed S. Rakoff said “When this settlement first came to me, it seemed to be lacking, for lack of a better word, transparency. I did not know much about the facts from the complaint, I did not know much, or really anything, about the basis of the settlement.” In other words, the deal was made behind closed doors in a smoke-filled room by parties who simply want to be rid of the problem.

The judge is doing public shareholders, and perhaps the SEC, a favor by saying that large companies can not deceive the people who own their stock and then get off with comparatively small fines. B of A shelled out billions of dollars in bonuses to Merrill workers while closing a deal that nearly took the big money center bank under. In exchange, it gets a public rebuke and a fine that is extremely modest.

Rakoff seems unwilling to back down and approve the settlement, which he has been asked to do by the parties more than once. He appears ready to go through a long process of dragging the details of what the bank did out of the parties even if it is a long process that  eats up significant parts of the SEC’s time and a large sum of legal fees for the bank.

The bank’s fault in paying out bonuses and not properly disclosing them in the proxy may be fairly clear. What is not so obvious is that the SEC decided to dispense with the problem with a minimum of work. That would be another black mark on an agency that has come under Congressional scrutiny for doing too little to regulate the markets for which it is responsible.

The SEC’s reputation may be the largest single victim of Rakoff’s rulings.

Douglas A. McIntyre

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