Federal District Judge Jed S. Rakoff was supposed to a approve a $33 million settlement between the SEC and Bank of America (BAC) over the issue of the financial firm making inaccurate statements regarding Merrill Lynch employee compensation. These statements were made in the B of A proxy that was sent to shareholders to approve the Merrill buyout.
It turns out that the judge believes that the SEC let the bank off too easily, and that the seriousness of B of A’s actions warrants more than a $33 million slap on the wrist.
Rakoff made an unusually lucid comment about something that the SEC neglected to consider. “It does not comport with the most elementary notions of justice and morality, in that it proposes that the shareholders who were the victims of the bank’s alleged misconduct now pay the penalty for that misconduct,”Rakoff wrote. Why should B of A shareholders be forced to be suffer twice when they should not suffer at all?
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This decision by the judge will have broad implications. The SEC will have to spend more of its time in court actually prosecuting companies for misdeeds. It is unlikely to have the money to do that. Congress will have to decide whether it wants to live with a culture at the commission of shoddy investigations, easy settlements, and little tough litigation or give the SEC a much larger budget. Corporate America is going to find it is more expensive to cross the solid white line of regulation. The trend will still cost shareholders plenty. All those new legal fees spent in defense of bad behavior will come out of their pockets. That is unless the fines and penalties that are a part of future SEC’s prosecutions are so severe that America’s public companies begin to learn a new lesson. That is, it is less expensive to cheat than to conduct business honorably, in spite of the many executives who became improbably wealthy while shareholders became impossibly poor.
The shareholders who have the least to say about how their companies are run may finally reach the point where they will not have to bear the brunt of the dishonesty at the companies they own and the incompetence at the SEC, the agency that is supposed to oversee these very companies.
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Executive Producer: Philip MacDonald
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