In the past, the SEC, CFTC, and other supposed regulators became accustomed to rubber stamps on numerous settlements that have whitewashed executive misconduct, at the expense of shareholders. This process, encouraged by the fact that many so-called "regulators" look forward to quickly return to the banking industry after their stay in government, appears to be changing.
The Oligarchs of Wall Street, their pawns at the Federal Reserve, and the revolving door “regulators” have lost credibility. The first blow came in a Manhattan courtroom at the U.S. Federal Court for the Southern District of New York, a few weeks ago. Chief Judge Loretta A. Preska, in a well reasoned opinion, required a recalcitrant Federal Reserve to disclose details of its stealth bailout of the big Wall Street banks. The Fed sought to illegally hide the details behind trillions of dollars of cash giveaways, from a duly filed “Freedom of Information Act” request, made by Bloomberg News. That order is now on appeal.
Federal District Court Judge Jed S. Rakoff, a judge of the same court in Manhattan, has leveled the next blow against tyranny. On Monday, September 14, 2009, Rakoff rejected a proposed $33 million settlement of a securities fraud case brought by the Securities and Exchange Commission (SEC). The SEC claims that Bank of America Corp. (NYSE:BAC) lied to shareholders concerning bonuses awarded to executives of Merrill Lynch & Co., immediately prior to the merger of the two companies. Prior to a vote of shareholders needed for approval or disapproval of the transaction, Bank of America officials claimed that Merrill Lynch had agreed not to pay any bonuses to executives until after the merger. That was a lie. In truth, they were aware of, and had already approved $5.8 billion in bonuses for Merrill’s executives. The SEC and the bank asked the judge to approve a settlement whereby, in the Judge’s words:
“…management of Bank of America – having allegedly hidden from the Bank’s shareholders that as much as $5.8 billion of their money would be given as bonuses to the executives of Merrill who had run that company nearly into bankruptcy – would now settle the legal consequences of their lying by paying the S.E.C. $33 million more of their shareholders’ money. This proposal to have the victims of the violation pay an additional penalty for their own victimization was enough to give the Court pause… 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 in order to “better assess the quality and performance of management” is absurd.”
Instead of approving the abusive settlement, Judge Rakoff set a trial date of February 1, 2010, and wrote:
It is one thing for management to exercise its business judgment to determine how much of its shareholders money should be used to settle a case brought by former shareholders or third parties. It is quite something else for the very management that is accused of having lied to its shareholders to determine how much of those victims’ money should be used to make the case against the management go away.
Perhaps, the most important thing that the Judge had to say is not contained in the body of the order, but, rather, in footnote 1. There, he writes:
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. Since $3.6 billion of that money had already been spent, indirectly, to compensate the Bank for the Merrill bonuses – not to mention the $20 billion in taxpayer funds that effectively compensated the Bank for the last-minute revelations that Merrill’s loss for 2008 was $27 billion instead of $7 billion – what impediment could there be to paying a mere $33 million (– or more than most people will see in their lifetimes –) to get rid of a lawsuit saying that the bonuses had been concealed from the shareholders approving the merger? To say, as the Bank now does, that the $33 million does not come directly from U.S. funds is simply to ignore the overall economics of the Bank’s situation.
In the end, the Judge found that the proposed settlement was nothing more than a “contrivance” between the SEC and Bank of America, designed to whitewash the entire affair without holding any of the miscreants liable. He points out that part of the contrivance involves blaming BAC lawyers for making the decision not to disclose, while, at the same time, hiding behind attorney-client privilege to prevent disclosure of what those lawyers really advised. Even the most novice lawyers know that attorney-client privilege is waived if management testifies that they relied on the advice of the attorneys to make management decisions. Furthermore, the privilege does not extend so far as to protect conversations with attorneys who may, themselves, be culpable for intent to commit securities fraud.
More likely, the decision to lie to shareholders had nothing to do with attorneys. They probably advised against it. The bogus assertion of a legally unjustifiable application of attorney-client privilege is not intended to protect attorneys. It is much more likely that the decision to lie to the shareholders was made by BAC Chairman Ken Lewis and his underlings, in concert with members of the BAC Board of Directors, Fed Chairman Benjamin Bernanke, and then Treasury Secretary Hank Paulson. The culpability of politically powerful individuals, and wealthy big bank executives, is why the SEC, as usual, is trying to help cover up the affair with a bogus $33 million settlement.
The duty to protect our American Republic against the tyranny of a small cabal of oligarchs on Wall Street, is now in the hands of our Federal Courts. Judges Rakoff and Preska should be applauded for their willingness to do the right thing, against political pressure from Washington. They are standing up and being counted. Judges like Preska and Rakoff will help restore our Republic to its former glory. Let us hope there are more like them.
Disclosure: No current positions in Bank of America.