September 14, 2009 1:33 PM

Rakoff Voids SEC-BofA Settlement, Slams All Involved

Posted by Zach Lowe

Judge Jed Rakoff has just voided the controversial settlement between the Securities and Exchange Commission and Bank of America over the bank's alleged failure to inform shareholders that it would allow Merrill Lynch executives to pay billions in bonuses after the two banks merged last year. And, to be frank, the decision is a complete and utter smackdown of the proposed $33 million settlement between the SEC and BofA.

In a 13-page order available here at the New York Times's DealBook blog, Rakoff variously calls the settlement "trivial," "absurd," and "neither fair, nor reasonable, nor adequate." His primary objection seems to be that shareholders would indirectly pay for the alleged failure to disclose the bonuses, since the bank, not the individual executives who struck the merger agreement, would pay the fine. The SEC, according to Rakoff, says it cannot punish BofA executives because those executives did not craft the merger agreement in a way that--according to the agency--violated disclosure rules. Who did craft the merger agreement in such a way?

According to the SEC, that would be the lawyers who wrote the agreement--Wachtell, Lipton, Rosen & Katz for BofA and Shearman & Sterling for Merrill. Rakoff responds with a sentence that must frighten any M&A lawyer: "If that is the case, why are the penalties not then sought from the lawyers?"

As we've written at length, the pointing of the finger at outside counsel has raised serious questions about whether the bank waived attorney-client privilege in its talks with the SEC, and whether Rakoff may try to extend that waiver into his courtroom. The bank, for its part, has denied any wrongdoing, saying it is routine to conceal sensitive information, such as bonus payments, in confidential statements filed at the same time as public merger agreements.

Rakoff goes on to chastise BofA (and, presumably, its current counsel at Cleary Gottlieb Steen & Hamilton) for failing to answer basic questions, such as "who made the relevant decisions as to what to include and not include" in the public merger documents. He doesn't spare the SEC, accusing the agency and the bank of striking an agreement "designed to provide the S.E.C. with the facade of enforcement and the management of the bank with a quick resolution of an embarrassing inquiry--all at the expense of the sole alleged victims, the shareholders."

Ouch. Expect a larger discussion later today from our colleagues at The Am Law Litigation Daily and Corporate Counsel. Make a comment

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