A New York judge has agreed to let Bank of America settle its lawsuit with the Securities and Exchange Commission, but he had harsh words for both sides.
The judge, Jed Rakoff, wrote that he had serious reservations about the settlement, which will let Bank of America pay $150 million over accusations that it didn't properly disclose billions in bonuses at Merrill Lynch.
He questioned whether the fine was big enough, and wondered why the SEC chose to charge the bank just with negligence rather than intent to mislead. He called the settlement "half-baked justice" and scolded the SEC for appearing content with "modest and misdirected sanctions."
Were he asked to approve the settlement on its merits alone, he added, he would have rejected it.
But, Rakoff added, the law requires him to defer substantially to the SEC's judgment, and he said he did not want to abuse his power by imposing his own preferences. He called his ruling an exercise of "self-restraint."
Rakoff's ruling, issued late this morning, means the bank and the SEC do not have to go to trial next week as previously planned. But Bank of America still faces Merrill-related charges from New York Attorney General Andrew Cuomo, as well as private lawsuits from shareholders who feel they were misled into voting for the Merrill deal.
Bank of America and the SEC have been fighting for months over whether Bank of America properly disclosed to shareholders $3.6 billion in bonuses that Merrill paid to its employees in late 2008, just before Bank of America closed its purchase of Merrill. Bank of America has said it did nothing wrong, because shareholders should have been able to determine from regulatory filings that bonuses would be paid.
Rakoff disagreed, ruling that Bank of America failed to adequately disclose the bonuses and losses. He also scolded the SEC, wondering why it alleged only that the bank acted negligently.
He noted that Cuomo's office has reached "a more sinister interpretation of what happened," and has accused the bank of willful fraud motivated by "self-interest, greed, hubris and a palpable sense that the normal rules of fair play did not apply to them." (Rakoff also noted that, "perhaps ironically," the Cuomo investigation is being led by a former SEC official.)
The SEC has said it didn't find evidence to charge the bank with intent to mislead.
Rakoff said he was not making any determinations about whether the SEC or Cuomo's office is offering the correct version of events. Rather, he said, he needed to determine if the SEC was ignoring evidence. In the end, he decided that the SEC's determinations are "a reasonable conclusion, supported by substantial evidence, that a reasonable regulator could draw."
One incident that Rakoff examined closely was the December 2008 firing of Tim Mayopoulos, the bank's general counsel. Cuomo alleges that Mayopoulos was fired because he "knew too much" about Merrill's mounting losses. The bank has denied this, saying he was fired because some bank officers wanted to give his job to Brian Moynihan, who was named CEO a year later.
Rakoff concluded that there is no evidence that directly contradicts the bank's story. But, he added, "This is not to say that plausible contrary inferences might not be drawn."
Though Rakoff had plenty of problems with the settlement, he also noted that it was far better than the first version, which the SEC and Bank of America proposed in August. That would have required Bank of America to pay $33 million, without admitting or denying guilt.
Rakoff had rejected that proposal, leading to the new settlement that was proposed this month.