Pearlstein: Activist Judges Necessary for Banking Regulation

Steven Pearlstein
Washington Post Columnist
Wednesday, September 16, 2009; 11:00 AM

Washington Post business columnist Steven Pearlstein was online Wednesday, September 16 at 11 a.m. ET to discuss Judge Rakoff's decision to reject Bank of America's settlement with SEC, and why Rakoff is exactly the kind of activist judge we need more of, not less.

Pearlstein won a Pulitzer Prize in 2008 and is co-moderator of the On Leadership discussion site.

Submit a question or comment now or during the discussion.


Washington, D.C., Looking At The Judge: Mr. Pearlstein, It's clear that Judge Rakoff's decision is and will remain a significant event throughout the life of this case. But do you think that Judge Rakoff may have hurt his own best-desired outcome?

After all, this is a District Judge who was basically removed from his partnership at Fried, Frank; was rejected three times for promotion to the 2nd Circuit, and primarily has a record of reversal, from a Circuit that upholds at over a 70% rate.

Any thoughts?

Steven Pearlstein: Well, I was unaware of his professional history, if indeed what you say is true. Clearly he isn't a member of the club, though, judging from his lack of judicial temperment in this case. I also have no doubt that the Second Circuit will slap him down. The guild has a tendency to do that, doesn't it?


Reston, Va.: Steven,

Given the judge's stated goal to protect the shareholders from management's transgressions, what is an appropriate settlement in this case? As a shareholder, am I not an owner of the company, albeit one without meaningful leverage to affect day-to-day decisions? Don't I have responsibility for the management I theoretically helped get elected?

Steven Pearlstein: The judge put it correctly: you're the victim, primarily, in this case, except to the extent that you (and other shareholders) collectively voted for this management team in the last Soviet-style election, which is what passes for corporate democracy in this country.


Laurel, Md.: Thank you for bringing this to our attention. I never understood the concept of "Corporate wrongdoing." Corporations are legal fictions; only people can take action. Every illegal act performed by any corporation was, in fact, committed by a person or persons, with at least the tacit complicity of others. The "others" should not include the watchdog agencies.

Is there any way to re-write the laws and regulations to enforce more personal accountability? As it is, the shareholders eat any fines, but they probably shared in any illegal or unethical profits, too. The only way to stop some of this is for the perpetrators to have some fear of personal responsibility. At some of their income levels, fines are virtually meaningless; the prospect of prison time might get their attention.

Steven Pearlstein: First of all, I don't think you need to criminalize all bad behavior. There should be civil penalties and sanctions, including orders that people can no longer serve as officers or directors of public companies. Trust me -- executives don't like that kind of embarrassment. And then there are fines, which can be commensurate with someone's pay (like a year's worth of bonus, for example). That doesn't mean the corporation shouldn't be cited or even sanctioned. But as you say, the fines are a bit of a shell game.


From your publisher: At first I was enthralled with your snappy column this morning with its manufactured outrage against justice and other random provocations. But then I realized that you were using sarcasm. This bummed me out. I think you should put a stop to actions that bum me out. Please discuss further with Krauthammer and Gerson -- the advertisers are VERY pleased with their work.


Steven Pearlstein: Very funny. But trust me, the advertisers have nothing to do with anything Charles or Gerson or I write.


New York: Hate to disagree with you, but if a Patrick Fitzgerald or an Eliot Spitzer was turned loose on Wall Street with a fistful of subpoenas, the result would be more indictments than you've had hot dinners. Madoff was a side show and a distraction. In some states, like Florida, they were hiring winos to pose as purchasers in these fraudulent mortgage schemes - are we really to believe that the masters of the universe weren't engaging in similar behavior, and that all the criminality was with the people on the ground [sounds like Abu Ghraib!]. ? If the whole mess is not investigated from top to bottom, we'll never know, will we? We need real Congressional hearings like they had in the 30's, and prosecutions if warranted, which will be the ultimate "re-regulation" of the financial sector.

Steven Pearlstein: See the story in the Post's business section today about Mr. Pecora, by Brady Dennis.


Washington, D.C.: Thank you for your fine article on Judge Rakoff's rejection of the proposed settlement agreement between BOA and the SEC. As an attorney in private practice for more than 33 years, I have grown increasingly disgusted with the practices illustrated by this example. If you should like to write another, you may be interested in another example involving the Western energy crisis -- where consumers are still trying to recover billions from entities that intentionally manipulated the market or were able to charge excessive rates because of the manipulation of thers -- in which FERC failed to take the most rudimentary steps to protect ratepayers. After dozens of proceedings in which FERC entered into settlements with pennies on the dollar, FERC recovered a mere $30 million -- and then, in what is referred to as a "cram down settlement," distributed large sums of that amount to parties that were themselves accused of wrongdoing, and/or denied market manipulation had ever occurred, submitted no claims, and resisted the refund efforts of injured consumers, who typically received less than 1/10 of a cent on the dollar, but were forced to "agree" to the settlement or be totally excluded from receiving even that.

Philip Chabot McCarthy, Sweeney & Harkaway, P.C. 202-345-6383

Steven Pearlstein: Unfortunately, this happens all the time. Sometimes the law, as they say, is an ass.


New York: Steve, You're correct (as usual), but I hate to say this isn't going anywhere other than providing some temporary embarassment. What's totally pathetic is that only a short while after the financial universe nearly collapsed, it's business at usual. I didn't think there would be any wholesale changes after last year, and I guess I've proven myself right. If last year didn't provide pretext for some meaningful reforms, I don't know what will.

Steven Pearlstein: There will be changes, but in the scheme of things, they will be adjustments to the status quo. The basic culture of Wall St., of regulation, or the law will all remain the same. There is a reason why things are the way they are -- the people in charge like it that way.


Charlotte, N.C.: Cute article today. You had me going there. But as a common dirt forester living in a (former?) banking town, what is the likely outcome? A monetary fine against BoA is not an answer, for it continues to hurt the shareholders. A fine directly against the pockets of the responsible and/or knowing individuals would be wonderful, but does that ever happen? And if so, I can envision a corporate reimbursement of the fine - excuse me - a bonus to cover the expense. So will anyone really be held responsible? A scapegoat perhaps, but they will land another well-paying job elsewhere. How does the shareholder come out a winner (or less of a loser)? What would teach management to think twice before doing wrong? Realistically, I do not see any worthwhile punishment coming out of this. Please tell me I am wrong.

Steven Pearlstein: The judge is right to be focused on the attorneys. They drive the disclosure (or, more accurate, the non-disclosure) process and they should be sanctioned. And the whole things won't change until they are.


Arlington, Va.: I am not sure I completely understand the issue at hand, but as a BofA stockholder when the merger occurred, I have already been punished by the government for forcing this merger in the first place. How does taking actions that will depress my stock price even more seem fair? It's like double jeopardy.

Steven Pearlstein: That's the judge's point, too.

_______________________ Pecora Ushered in Wall Street Regulation After 1929 Crash


Boston: So if this activist judge is more worried about outcomes than process in the BoA bonus case, what is the likely outcome of a trial versus the settlement, and what will be the lessons learned for the SEC and other banks/public companies?

Steven Pearlstein: I'm afraid all the wrong lessons will be learned because the Second Circuit will slap down Rakoff and send the signal to every other district judge not to upset the applecart. We can't have unelected judges second guessing the judgments of litigants and their lawyers or the entire judicial edifice will come to a grinding halt!


Bethesda, Md.: Your story about the Company Disclosure Schedule reminded me of the fictional Arthur Dent's travail in learning about the bulldozing of his house (from Hitchhiker's Guide to the Galaxy):

"But Mr Dent, the plans have been available in the local planning office for the last nine months."

"Oh yes, well as soon as I heard I went straight round to see them, yesterday afternoon. You hadn't exactly gone out of your way to call attention to them, had you? I mean, like actually telling anybody or anything."

"But the plans were on display ..."

"On display? I eventually had to go down to the cellar to find them."

"That's the display department."

"With a flashlight."

"Ah, well the lights had probably gone."

"So had the stairs."

"But look, you found the notice didn't you?"

"Yes," said Arthur, "yes I did. It was on display in the bottom of a locked filing cabinet stuck in a disused lavatory with a sign on the door saying 'Beware of the Leopard'.

Steven Pearlstein: Cute.


Mt. Lebanon, Pa.: So a federal judge decided not to lockstep with the knucklehead-ocracy of Wall Street/Washington D.C.?

Goodness. Don't tell me one guy can challenge the whole sordid seamy system? Then again, I thought that's why I voted for OBAMA!

Thanks much. HLB

Steven Pearlstein: Actually, it was Obama's SEC that was prepared to go along with this settlement and leave the lawyers and executives untouched.


Washington, D.C.: Why do we need the SEC? I am serious. We have an IG report on the agency's mysterious bungling of Madoff, showing they did nothing for eight years in face of clear evidence. Now Judge Rakoff's ruling, which again shows the agency colluded with BOA at the expense of shareholders. Why not turn over the secretarial functions of the SEC (registering new stocks, etc.) to the Commodities Futures Exchange Commission or some other agency and kill off the SEC? The evidence is that the SEC is filled with do-nothing employees who not only have failed their assignment of protecting shareholders, but are actually colluding with wrongdoers. If the SEC is going to cooperate with felons and frauds, why do we need it? With no SEC and federal preemption, state attorney generals would be unleashed to root out fraud.

Steven Pearlstein: I think you've probably painted the SEC with too broad a brush. There have been some glaring examples of incompetence, but you have to see that in the context of restricted funding (relative to the size of markets being regulated) and a philosophy for the previous 6 years that was antithetical to enforcement or even regulation. Mostly, though, I think this is a problem with the legalistic culture over there at the SEC. They are so encumbered intellectually by the legal processes they use that they sometimes forget to stand back and see what they are doing the way an ordinary person would and have an ordinary human reaction. And that goes all the way up to the commissioners. For once, I'd like to see a couple of non-lawyers appointed to the commission. It would do the agency a world of good.


Columbia, Mo.: I see an interesting juxtaposition of legal theories. Apparently the Supreme Court is going to decide that the First Amendment right of unfettered free speech applies to corporations, because they have lots of money to spend on campaigns. On the other hand, the common practice you describe, being quixotically resisted by Judge Rakoff, is to make corporations immune from being held to account for lying to their shareholders, who don't have any say over what political stands the corporations take, either.

I predict that Judge Rakoff will be shot down about 6-2 (Sotomayor recusing) by the Supremes for applying logic to securities law, because his decision would make corporations accountable. Your take?

Steven Pearlstein: Won't get there. The Second Circuit will take care of Rakoff the way they always do.


Washington, D.C.: I agree with Rakoff's disdain over the stockholders having to pay the corporate penalty imposed by the SEC.

Is it possible that this Bank of America lawsuit, or other pending SEC lawsuits regarding the bonuses, if any, will lead to individual liability or criminal penalty in addition to corporate liability?

By the way, I was cringing at your provocative straw-man defense of SEC reports being form over substance, protecting attorney's career and reputations with the attorney-client privilege, and judges only interested in clearing their docket. I am agreeing that the judiciary needs more like Rakoff.


Steven Pearlstein: Why were you cringing Greg? Because you know its true?


Bonifay, Fla.: Great article, Steven. Simple solution - Fine Wachtell Lipton (law firm) the $33 million (it was neither an "error" or "omission" so that insurance shouldn't cover) and disbar the top lawyers on the team that produced the proxy. The average SEC lawyer would have little chance in a case like this, sort of like sending someone with a sword against an AK-47.

Steven Pearlstein: Wonder what the name of the Wachtell partner is who was overseeing the Bank of America account?


Austin, Texas: Steven - Good piece today.

Call me cynical, but what's the likely outcome of a trial? I have no doubt that BoA lawyers will be able to find plenty of wording in the fine-print that they can equate to full disclosure.

Why do I shake my head and think that a jury will find that they acted to the letter-of-the-law?

I'm frustrated that, despite the righteous action by Rakoff, the execs at the top, who knowingly perpetrate these deceptions, not only don't get financially penalized, but face no threat whatsoever of serving the jail time that they deserve.

Is anything going to change, or is this just what we're all going to have to put up with until the whole house of cards collapses?

Steven Pearlstein: If it ever goes to trial, which I doubt, the bank will lose and lose badly. I've read their brief and if I had had more space I could have a field day with all the hair splitting they engaged in.


Washington, D.C.: Didn't Judge Rakoff do something similar regarding a settlement in the WorldCom litigation?

Steven Pearlstein: Yup.


Chicago: Steve, I work in a large bank, though one generally unafflicted by the chaos of the past year. I think anyone with a pulse who works in finance knows that to fail to disclose material information from your shareholders before they vote on a merger is blatantly wrong and they knew it was. Clearly punishing the shareholders through a fine of the company does not punish the offenders. This is on the level of Enron obfuscation in my opinion. If we do not punish the offenders, how do we discourage this from happening again? Sadly, I believe that the govt is trying to keep the facts out of the sunlight since the pressure to close this deal, come hell or highwater, was coming from the govt itself. Interested in your thoughts.

Steven Pearlstein: I was with you until your comment that the government is trying to prevent the facts from coming out. The government actually ferreted out most of the facts in this case, up to the point of finding out who exactly said what to whom when the lawyers got involved.


D.C.: Lest the character assassination in your first question today go unchallenged, Judge Rakoff was a highly respected federal prosecutor in the U.S. Attorney's office in Manhattan, then a partner at two prominent law firms, first Mudge Rose and then Fried Frank. He was one of the leading white collar defense lawyers in the N.Y. bar, involved in many of the prominent cases of the period; he represented Martin Siegel in the criminal and civil matters arising out of the Boesky era, for example. His reputation among N.Y. lawyers now is for being extremely smart, impatient, crusty and fair-minded, and his opinions have held up very well in the court of appeals. One can agree or disagree with this ruling, but baseless personal attacks have no place in the discussion.

Since you are answering questions -- since the shareholders are always harmed by civil penalties against a corporation (and were never the ones who engaged in wrongdoing), do you think Judge Rakoff's ruling will undermine this remedy in cases of corporate wrongdoing?

Steven Pearlstein: Thank you for "correcting" the record. I, myself, have no idea whether you are right or the previous poster, but I'm guessing you know your stuff.

As to the subject of imposing penalties on corporations, there are two possibilities. One is that the corporation did something bad, maybe earned extra profits because of it, and needs to be punished, along with individuals. In that case, I don't have any problem "punishing" the shareholders, not only to recoup ill gotten gains but also to make sure that they pay more attention to the management that, in theory, they have helped to select through their "elected" representatives on the board of directors.

But in cases like this, where the wrongdoing is by the management for failing to disclosure important information and insights to the shareholders, imposing a fine that effectively punishes the very same shareholders is absurd. Some of the more conservative SEC commissioners have also complained about ths in the past, but they have been shouted down by the SEC enforcement establishment, which thinks fines are good and more fines are always better. They equate fines with tough enforcement. In this case, I think they are wrong.


Sometimes the law, as they say, is an ass: But as your reader reminded us: there ain't no corporations doing this stuff. Just folks. Plain old very rich folks.

Maybe you can start "Naming Names", a new segment on the Washington Post online group. Who knows: maybe it's folks we know!


Steven Pearlstein: I'll pass the suggestion along to the business editor. But don't hold your breath.


Arlington, Va.: The House Banking Committee is putting together new securities regulation. What are the chances that the SEC will be abolished and merged into a new agency that will do something about protecting shareholders?

Steven Pearlstein: Zero.


Fairfax, Va.: Hi Mr. Pearlstein,

I'm a vet (animal type). I don't pretend to understand all of this, but my bottom line question is this--while Judge Rakoff is striking a blow for us, the "little guys", do you think it'll have a lasting effect, or is more quixotic?


Steven Pearlstein: He's gotten a good ride out of it in terms of publicity, but the establishment always rallies around the status quo once the public's attention turns somewhere else. The Second Circuit will ride to the rescue, you wait and see.


Evanston, Ill.: Hey Steven, I like your overall point but I don't have any sympathy for the BOA shareholders. They have benefited tremendously from direct and indirect government largess, indeed their very survival was guaranteed. So what if Paulson, in the heat of crisis management, twisted some arms to help save the system? The Merrill Lynch deal now looks quite attractive for shareholders anyways. I agree with your main point but I can't muster any tears for BOA shareholders.

Steven Pearlstein: Look, the average share of B of A stock has probably been bought and sold ten times since the merger, so the whole notion of "shareholder" as owner has been rendered almost absurd by the Wall Street casino.


D.C.: How do you feel about shareholders suits in general, where the funds for settlement, including significant legal fees, come from the corporation, which, of course, is owned by the shareholders?

Steven Pearlstein: That, and most of the proceeds go to the class action lawyers. I think there is a role for private regulation, as they call it in the legal academy, but the current mechanisms don't work very well, in my opinion.


Fairfax, Va.: I know the BoA/Merrill case doesn't rise to the level of Enron, but reading your column reminded me of the (late) Arthur Andersen Co., which was brought down by the actions of its Houston office. Why wouldn't the lawyers at Wachtell be held accountable like the accountants at Andersen?

Steven Pearlstein: That's the question Rakoff wanted answered, but couldn't get the information.


Anonymous: Some "glaring examples of incompetence" you say. That's like going to Ford's theater the night Lincoln was shot and concluding there was a minor distraction that caused the play to be suspended. Might I point out to you that Madoff is a $65 billion fraud? We have never seen anything of this magnitude which, it turns out, could have been easily caught early.

Steven Pearlstein: It's a glaring example of incompetence. I stand by that description.


OK, no aboloshing the SEC: I agree, abolishing the SEC will never happen. How about a new government organization whose charter is to be a shareholder watchdog? It could probably pay for itself with the amount of potential fines to be levied.

Steven Pearlstein: That IS the SEC's charter. It's just you wouldn't know it sometimes.


misquoter: I liked the article, but aren't you concerned that the ironic tone will be negated by those who quote the first part of the story and ignore the second?

Steven Pearlstein: Not really. If I sat around worrying about people taking every sentence I write out of context, it wouldn't be very interesting journalism. It would be like....well, a political speech.


Falls Church, Va.: Just FYI, I used to work at Fried Frank, with partners who worked with Rakoff, and I never heard about his having been marginalized at the firm.

Steven Pearlstein: Thanks for that update.


Steven Pearlstein: That's it for today, folks. "See" you next week.


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