February 22, 2010 1:03 PM

Rakoff on BofA: "While Better than Nothing, This Is Half-Baked Justice"

Posted by Zach Lowe

Federal district court judge Jed Rakoff has approved a settlement that will end the Securities and Exchange Commission's litigation against Bank of America, in which the agency charged the bank with failing to make adequate disclosures to shareholders before they voted on BofA's merger with Merrill Lynch in late 2008. 

The settlement, for which Rakoff has made little effort to hide his contempt, ends one major chapter in the ultra-controversial BofA-Merrill deal. As you'll recall, the SEC, New York attorney general Andrew Cuomo, and various attorneys for BofA shareholders have sued the bank for failing to disclose to shareholders that Merrill's fourth-quarter 2008 losses were ballooning well beyond public estimates and that Merrill had nonetheless approved up to $5.8 billion in bonus payments to employees. Even with the SEC settlement getting Rakoff's blessing, Cuomo's case and several shareholder actions against BofA live on--and Rakoff hints that further and harsher justice may await the bank in Cuomo's action. (BofA has claimed that its public statements about the merger did not violate any laws, and that it relied on its internal counsel and outside lawyers at Wachtell, Lipton, Rosen & Katz on all disclosure decisions.)

The terms of the deal are largely what the SEC proposed earlier this month: The bank will pay a $150 million fine to be distributed to shareholders who held shares in BofA at the time of the merger. (Those who held shares in Merrill and now hold shares in BofA get nothing.) The bank has also agreed to hire disclosure counsel and an independent auditor to monitor disclosure issues in the future. The bank's compensation committee must also choose an outside consultant to advise it on executive compensation going forward. Rakoff had wanted the SEC and the court to have some say over who that consultant would be, but the bank objected and Rakoff backed off the demand. 

You can read Rakoff's full order by clicking on the link at the bottom of this post.

BofA's counsel at Paul, Weiss, Rifkind, Wharton & Garrison and Cleary Gottlieb Steen & Hamilton declined to comment when we called them this morning and referred calls to a BofA spokesman. 

Rakoff continued on Monday to express his unhappiness with the deal, but approved it anyway, citing precedents requiring judicial restraint and deference to the SEC's wishes. He had previously voided a proposed $33 million settlement, calling it "trivial" and "absurd," while suggesting that the SEC must punish individuals--including, possibly, Wachtell lawyers--in order to truly punish the (allegedly) guilty parties. He didn't back off that position on Monday. He called the $150 million settlement "far from ideal" and termed it "half-baked justice at best." The penalties, Rakoff says, are "remedial measures that are neither directed at the specific individuals responsible for the nondisclosures nor appear likely to have more than a very modest impact on corporate practices or victim compensation."

Rakoff also raised the possibility that Cuomo's litigation against BofA and three top bank executives will yield further penalties. Rakoff noted that Cuomo's office "reached a far more sinister interpretation" of why BofA fired its general counsel, Timothy Mayopoulos, just days after shareholders voted on the Merrill merger. In voluminous records of depositions and internal BofA and Wachtell e-mails released last week, several executives claimed that the bank fired Mayopoulos in order to give his position to Brian Moynihan, who has since replaced Ken Lewis as BofA's CEO. But Cuomo's office argues in its complaint that the bank may have dismissed Mayopoulos because he "knew too much" about the disclosure decisions. Cuomo has also hinted that BofA may have "marginalized" Wachtell late in the decision-making process because it disagreed with the firm's advice. 

As we reported last week, the depositions and e-mails made public--about 1,000 pages in all--do not show any serious disagreement between Mayopoulos, Wachtell, and various bank executives about the disclosure issues. By November 20, after two conference calls and dozens of e-mails, all the parties involved had agreed that no detailed disclosure was necessary, the records show. 

Do the records and depositions in Cuomo's case--much of which have not yet been made public--contradict that narrative? Not enough for Rakoff to void the suit, the judge wrote in his ruling. Cuomo's office turned over to Rakoff excerpts of those records for his review over the weekend. 

Obviously, there is much more to come in this matter. Cuomo's case will proceed, as will shareholder actions against the bank in federal court in Manhattan and in Delaware's Chancery Court. (Wachtell is among the firms repping BofA in both of those cases). And plaintiffs lawyers in those cases may be allowed to review and use as evidence all of the internal e-mails--and more--the bank released to Rakoff last week; various experts have told us the bank's attorney-client privilege waiver in Rakoff's case is (by mistake) worded in such a way as to apply in other actions. 

So, as usual, stay tuned.

Download BofA Settlement

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