By Zachary A. Goldfarb
Washington Post Staff Writer
Friday, August 28, 2009
Wall Street's top cop has found itself in an uncomfortable spot: arguing that the bad deed at the heart of one of its biggest cases of the year wasn't that bad.
The Securities and Exchange Commission has sought to soft-pedal the allegations after a federal judge refused this month to approve a $33 million settlement between the agency and Bank of America over charges that the firm illegally hid from investors plans to pay billions of dollars in bonuses to employees of Merrill Lynch, the troubled investment firm it agreed to buy last fall.
When the SEC announced the case against Bank of America earlier this month, agency officials said the bank violated its duty to shareholders and deserved a "significant financial penalty."
Now, the SEC's hope of getting the judge to approve the settlement relies in part on officials convincing him that Bank of America's alleged wrongdoing wasn't so bad that it warranted a more aggressive investigation by the agency. The SEC has said that Bank of America acted in good faith but essentially made a careless error by not disclosing the plans to pay bonuses. (The bank says it did nothing wrong.) The SEC did not file charges against any executives at Bank of America or Merrill Lynch.
The SEC's about-face in the case -- as well as the sharp questioning by the judge, Jed Rakoff of the Southern District of New York -- has raised several questions about how the SEC seeks to punish wrongdoing.
Should the SEC seek to penalize only a company rather than individual executives if this approach means that the cost of the fine is ultimately borne by shareholders, who were the alleged victims in the first place?
Should the SEC hold corporate lawyers accountable for providing advice that allegedly contributed to the misdeed?
And should the SEC pursue the most aggressive case possible or the one with the best chance of success?
"The issue is of broader public concern because it's really at the intersection of the bailout of the banks and securities law. And the judge has been clear that he's unhappy with the bank paying the settlement and no individual officers and directors being sanctioned at all," said Adam Pritchard, a law professor at the University of Michigan.
The SEC says in court papers that it did not pursue cases against any of the executives or lawyers who played a role in the alleged wrongdoing because it didn't have the evidence to do so.
Obtaining that evidence, the SEC said, would have required that Bank of America waive its attorney-client privilege. But the SEC didn't have the power to try to force the bank to do so with this type of case.
In an order earlier this week, Rakoff found this line of thinking hard to believe.
"If the SEC is right in this assertion," he wrote, "it would seem that all a corporate officer who has produced a false proxy statement need offer by way of defense is that he or she relied on counsel, and, if the company does not waive the privilege, the assertion will never be tested, and the culpability of both the corporate officer and the company counsel will remain beyond scrutiny." He demanded more information from both parties by Sept. 9.
Rakoff also raised the possibility that the lawyers could be charged. The settlement "leaves open the question of whether, if it was actually the lawyers who made the decisions that resulted in a false proxy statement, they should be held legally responsible," he wrote.
Several experts gave different reasons for the SEC's approach to the case. Several agreed with Bank of America that the SEC's case isn't a particularly strong one and that the agency might have been seeking the quickest settlement it could.
"I suspect that the SEC was motivated by what is an urgent need in that agency to reestablish themselves as a tough cop on the Wall Street beat," said John Coffee, a professor at Columbia University.
Donald C. Langevoort, a law professor at Georgetown, has said it would be extremely difficult to have gotten a quick settlement if the agency went after top brass at the companies. "Had they been insistent on serious penalties against the individual wrongdoer, settlement would have been hard to achieve," he said.
Rakoff has a reputation for being a thorn in the side of government regulators as well as defendants. A few years ago, he increased the penalty that telecom company WorldCom had to pay to $750 million from $500 million after a massive accounting fraud. But rather than ordering WorldCom to pay the funds to the government, he had the company pay it to its own shareholders.
It is unusual for judges to intervene as Rakoff has done in the Bank of America case. But in two other instances this month, in high-profile criminal cases linked to finance, judges have rebuffed the requests of law enforcement agencies and taken even tougher stands against defendants.
Frank DiPascali Jr., who pleaded guilty to helping Bernard L. Madoff run his Ponzi scheme, was sent to jail after a judge ignored the recommendation of prosecutors that he be allowed to remain free on bail.
A week and a half later, Bradley C. Birkenfeld was sentenced to 40 months in prison for playing a role in setting up tax shelters for Swiss banking giant UBS. This was 10 months longer than prosecutors had sought.