The Dog that Ate Ken Lewis's Homework

A wholehearted three cheers for Jed S. Rakoff, the Southern District of New York judge who refuses to rubber stamp the SEC’s $33 million wrist slap on Bank of America for failing to disclose billions of dollars in bonuses paid by Merrill Lynch just prior to the merger of the two companies. Judge Rakoff rightfully wants some accountability: In addition to wanting to know who was ultimately responsible for failing to make the disclosure, he also wants an explanation as to how the SEC determined that $33 million was a suitable fine.

Bank of America’s (BAC) defense in this matter is shameful. The bank claims that the firm’s white shoe lawyers made the decision not to disclose the bonuses and the SEC says it can’t dispute this claim unless Bank of America executives agree to waive their attorney-client privilege, which they aren’t prepared to do. Adhering to the SEC’s longstanding policy of treating executives at major financial firms with kid gloves, the agency opted to give Bank of America’s executives a pass. So much for the SEC’s pledge that the agency’s era of “See No Evil, Hear No Evil” is over.

Bank of America’s defense has as much credibility as the proverbial elementary student who argued that he couldn’t finish his assignment because his dog ate his homework. Rest assured, Bank of America’s attorneys did not make the decision not to disclose the Merrill bonuses. They most probably rendered an opinion that failing to disclose the bonuses was legally defensible, but their memos were no doubt laden with all sorts of caveats. That’s likely why Bank of America doesn’t want to waive its attorney-client privilege; the bank’s executives no doubt knew they were skating pretty close to the line, but from a legal perspective, they believed they could get away with it.

One of the primary reasons CEOs get paid the big bucks is supposedly for their judgment. A responsible and effective leader gathers information from multiple sources and then makes a determination as to the best course of action. Credible CEOs accept the responsibility that the buck stops with them and don’t allow any constituency, including their company’s attorneys, to make critical decisions. I strongly suspect that James Burke, the CEO of Johnson & Johnson (JNJ) during the Tylenol tampering scare, was warned about the legal and marketing dangers of voluntarily recalling the product but he opted to do what he thought was the right thing to do. That’s called leadership.

Mr. Burke said his decision was made in keeping with Johnson & Johnson’s credo that the company’s focus is to do right by its customers. Bank of America CEO Ken Lewis clearly isn’t driven by any lofty-minded credos; rather, he is a corporate coward who survives by blaming others for his leadership failures. The competitive strength of any financial services company is the trust it instills, and as long as Ken Lewis remains at the helm, it is beyond me why anyone would trust the management of Bank of America.

Comments

[Graham and ...:]

Judge Jed Rakoff deserves to be nominated for the next available seat on the Supreme Court.

Aug 27 09:14 AM

[Big Jack58:]

I think we have to consider more than just this little interaction with Judge Rakoff when it comes to the BAC/Merrill deal and the SEC. Remember Paulson (SEC) admitted that he made heavy handed threats to force this deal to close. That immediately put BAC in between a rock and a hard place because if they did anything that would encourage their shareholders to vote against the deal, you bet the management team would have paid with their jobs. Additionally, if they didn't allow bonuses to be paid, then shareholders would have been steamed when the best sales and management staff left post-merger. Even though some high level Merrill folks left that company, we are now hearing that many of them were asked to leave ... maybe because they were part of the problems that caused that company's decline? When it comes right down to this Judge (and hats off to him for wanting to hear what happened), the only thing that he can hear (but won't) that will help here is that the SEC forced this deal which put BAC behind the 8 ball and ultimately strapped with $45B worth of government loans (that must be repaid and come with severe restictions) as well as replaced board members and management team. So include all the trouble BAC has gotten into because of the thuggery of the government and that $33 Million is no longer just a slap on the wrist.

Aug 27 10:23 AM

[User 477929:]

This all boils down to the government never should have bailed out Wall Street in the first place. If the government had stayed out of the way last fall and let the poorly managed companies fail we wouldn't have been talking about all of this now. One thing the government could have done is to vigorously enforce the law, but they seem to want to hand out welfare checks to Wall Street instead. One of the few useful things the Bush administration did was form the Corporate Fraud Task Force, but that has mostly been dormant since about 2004 or so. Ebbers (Worldcom), Skilling (Enron) and some others went to jail, but the CFTF should be expanded in the light of the continued corruption on Wall Street.

Aug 27 10:37 AM

[jstratt:]

Judge Rakoff is a hero!

The Securities Extortion Commission (SEC) needs to be obliterated and replaced by a regulatory body.

Seriously the SEC commissioners should be hauled before a court or public body to testify about why they arent a fraudulent group of conspirators. Perhaps they could explain why it only appears they are a fraudlent treasonous body.

What is their thinking?
What are they trying to accomplish?
Are they proud of their achievements?
What recommendations do they have?
How do they think their actions meet public goals?
Do they think their actions allow citizens pensions to be looted?
What do they think about flash trading?
Is allowing an advanced look at trading data and ability to trade to some special entities stealing from the US citizens? Why or Why not?
Do they think they are acting in citizens best interest?

Perhaps the appropriate name is the Securities Extortion Club!

Oct 01 09:32 PM