(CN) – A federal judge in Manhattan rejected as “worse than pointless” Bank of America’s proposed $33 million settlement over billions of dollars in controversial bonuses paid to Merrill Lynch executives. U.S. District Judge Jed Rakoff said the fine “further victimizes the victims” by making shareholders pay for executives’ alleged lies.
Judge Rakoff refused to approve the settlement, though the Securities and Exchange Commission had defended the deal as “fair, reasonable, adequate and in the public interest.” The agency’s statements were in response to the judge’s call last month for further explanation of what he deemed a “puzzling” agreement.
In his ruling Monday, Rakoff said the proposed deal “does not comport with the most elementary notions of justice and morality.”
The SEC had accused Bank of America of lying to shareholders about the $3.6 billion in bonuses paid to Merrill Lynch executives just before the companies’ $50 billion merger last year.
Bank of America allegedly authorized Merrill Lynch to pay up to $5.8 billion in discretionary year-end bonuses, but issued a proxy statement telling shareholders that it had agreed not to pay the bonuses without the bank’s consent.
Judge Rakoff said it “makes no sense” to fine the bank’s shareholders – the allegedly injured party.
The SEC tried to justify the corporate penalty, saying it “sends a strong signal to shareholders that unsatisfactory corporate conduct has occurred and allows shareholders to better assess the quality and performance of management.”
Judge Rakoff scoffed at this explanation.
“[T]he notion that Bank of America’s shareholders, having been lied to blatantly in connection with the multibillion-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,” Rakoff wrote.
The SEC also claimed that it didn’t have the proof required to charge individual executives, because any potentially incriminating records are protected by the attorney-client privilege.
“But if that is the case, why are the penalties not then sought from the lawyers?” Rakoff asked. “And why, in any event, does that justify imposing penalties on the victims of the lie, the shareholders?
“The injunctive relief … is pointless,” Rakoff concluded. “The fine, if looked at from the standpoint of the violation, is also inadequate, in that $33 million is a trivial penalty for a false statement that materially infected a multibillion-dollar merger. But since the fine is imposed, not on the individuals putatively responsible, but on the shareholders, it is worse than pointless: it further victimizes the victims.”
He continued: “Oscar Wilde once famously said that a cynic is someone ‘who knows the price of everything and the value of nothing.’ The proposed consent judgment in this case 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 this is done at the expense, not only of the shareholders, but also of the truth.”