(CN) - A Manhattan federal judge on Monday reluctantly approved Bank of America's $150 million settlement with the SEC over claims that the bank hid $3.6 billion in Merrill Lynch bonuses and $4.5 billion in net losses before shareholders voted to approve the 2008 merger. "While better than nothing," U.S. District Judge Jed Rakoff wrote, "this is half-baked justice at best."
Rakoff said the settlement's "greatest defect is that it advocates very modest punitive, compensatory and remedial measures that are neither directed at the specific individuals responsible for the nondisclosures nor appear likely to have more than a modest impact on corporate practices or victim compensation."
The SEC and the bank insisted that the nondisclosures were merely a product of negligence on the part of the bank, its executives and its attorneys before the bank's $50 billion merger with Merrill Lynch in 2008.
But Rakoff noted that a parallel investigation by New York Attorney General Andrew Cuomo "reached a more sinister interpretation of what happened."
The day before the SEC presented its proposed settlement, Cuomo accused Bank of America, former CEO Kenneth Lewis and former CFO Joseph Price of lying to shareholders, claiming they were "motivated by self-interest, greed, hubris, and palpable sense that the normal rules of fair play did not apply to them."
Thus, bank executives in Cuomo's scenario acted with a "far more culpable state of mind than mere negligence," Rakoff noted. He requested evidence from Cuomo's case to help him decide if the SEC "has ignored evidence of intentional fraud" that might cast doubt on the settlement.
This evidence included the deposition of Timothy Mayopoulos, Bank of America's former general counsel, who was abruptly fired on Dec. 10, 2008.
The bank claimed it fired Mayopoulos in order to keep Brian Moynihan, the current CEO, from leaving the bank by offering him Mayopoulos' position as general counsel. But Cuomo claimed Mayopoulos had been cut loose because Price discovered that he "knew too much" about the mounting Merrill losses.
Though Rakoff was skeptical of the bank's explanation, he concluded that "none of the evidence directly contradicts" the bank's version of events.
However, Rakoff emphasized that his ruling did not resolve whose interpretation -- the SEC's or the Cuomo's -- is correct.
"Rather, the court ... determines only that the SEC's conclusion that the bank and its officers acted negligently, rather than intentionally, in causing the nondisclosures ... is a reasonable conclusion supported by substantial evidence."
The settlement requires the bank to pay $150 million to the Bank of America shareholders victimized by the fraud, but not to former Merrill shareholders who now hold Bank of America stock.
The bank must also submit to an independent auditor, who will receive regular reports from independent disclosure counsel for the next three years. During that same period, the bank will also hire an outside compensation consultant to set executive pay, subject to shareholder approval -- a provision the bank adamantly fought.
Rakoff said such measures "should help foster a healthier attitude of 'when in doubt, disclose.'"
But he considerably less enthused about the $150 million penalty, which he called "paltry" given the scope of the bonuses and bailout. He acknowledged that it was better than the "vacuous" $33 million proposal he previously rejected, but said it still penalizes shareholders for executive fraud, one of the main reasons he tossed the earlier settlement.
"So should the court approve the proposed settlement as being fair, reasonable, adequate, and in the public interest?" Rakoff asked.
Were he deciding that question on the merits alone, Rakoff said, he'd reject it as "inadequate and misguided." But he cited judicial restraint and deference to the SEC in approving the agreement.
"In the exercise of ... self-restraint, this court, while shaking its head, grants the SEC's motion and approves the proposed consent judgment."
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