Judge Rakoff Indicts the Wall Street-SEC Incest

By Sep 15, 2009, 10:43 AM Author's Blog  

Will the American public ever truly know what happened in December 2008 when Bank of America (NYSE:BAC) shareholders’ interests were neglected by BofA’s management in completing its takeover of Merrill Lynch? Capitalism took a back seat to the supposed needs of financial expediency as defined by then Treasury Secretary Hank Paulson and Fed Chair Ben Bernanke.

How could the SEC pretend to uphold its mission and protect the BofA shareholders’ interests which were clearly violated last December? The SEC imposed a $33 million fine against BofA in hopes that the courts and American public could once again be duped in the process. The $33 million fine is chicken feed for an institution such as BofA that had received $40 billion in taxpayer bailout money.

Against this backdrop, I wholeheartedly commend and endorse U.S. District Judge Jed Rakoff for throwing out this contrived agreement between the SEC and BofA. The Wall Street Journal provides further details this morning in writing, Judge Tosses Out Bonus Deal:

A federal judge threw out the Securities and Exchange Commission’s proposed settlement with Bank of America over its disclosure of controversial bonuses paid to Merrill Lynch employees, in an unusual ruling that casts doubts about how the agency handles probes of major U.S. companies.

The order, by U.S. District Judge Jed Rakoff, came as the New York State attorney general was weighing civil-fraud charges against Bank of America Corp. executives. Charges could be brought against the bank’s chief executive, Kenneth Lewis, and Chief Financial Officer Joseph Price, according to a person familiar with the investigation.

The Rakoff ruling undermines one of the most high-profile cases against alleged corporate wrongdoing conducted under SEC chief Mary Schapiro, who took the job in January. It puts new pressure on the agency to show it is fighting for investors in the wake of the controversies over its policing of the financial industry during the Wall Street boom and its failure to catch Bernard Madoff’s massive fraud despite several red flags.

In a rare scuttling of an SEC settlement, Judge Rakoff said the $33 million fine levied on Bank of America “does not comport with the most elementary notions of justice and morality” because the company’s shareholders — the victims of the alleged misconduct — are the same people being asked to pay the fine. He set a trial date for Feb. 1. (emphasis added)

While Wall Street professionals, government regulators, and even media analysts would define this particular case as a ‘one off’ or ‘dealing with exceptional circumstances,’ I beg to differ. I strongly believe this case is a perfect example of the incestuous relationship between Wall Street and those charged with protecting investors, namely the SEC and FINRA. How often are investors’ interests neglected at the expense of the financial industry? More often than investors could possibly imagine.

The Wall Street Journal’s editorial, Rakoff Rakes the SEC, strikes a similar chord in writing:

The judge had other complaints, but broadly the deal “suggests a rather cynical relationship between the parties: the SEC 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 of this is done at the expense, not only of the shareholders, but also of the truth.” The parties will go to trial in February.

We look forward to it, especially in light of the recent news that Fed and Treasury knew all about these bonuses and stayed mum. Judge Rakoff has done a public service by exposing the political point-scoring that drives far too many regulatory actions. (emphasis added)

America needs more judges with the courage and integrity of Jed Rakoff. I salute him.

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