The settlement was not crafted to act as a deterrent to future wrongdoing or to give the investing public confidence that the SEC is looking out for their interests in this post-Madoff era.
U.S. District Court Judge Jed S. Rakoff had finally approved the settlement between the Securities and Exchange Commission and Bank of America. Our concerns seemed at least to have made an appearance in the courtroom, though they clearly did not carry the day.
As we set out here before the judgment, our greatest misgiving in the proposed settlement was the inherent unfairness surrounding the $150 million penalty, which effectively involved the transfer, without their consent, of money from one shareholder pocket to another. The main players in the abuse, which included key officers and directors, got a pass on making any payment proportionate to their responsibility. To us, the settlement could easily have been concocted by Groucho Marx. It was not crafted to act as a deterrent to future wrongdoing or to give the investing public confidence that the SEC is actually looking out for their interests in this post-Madoff era.
Judge Rakoff correctly focused on this shortcoming in his combined opinion and order:
An even more fundamental problem, however, is that a fine assessed against the Bank, taken by itself, penalizes the shareholders for what was, in effect if not in intent, a fraud by management on the shareholders.
Unfortunately, the specter of judicial deference to tribunals like the SEC was also looking over his shoulder and he was unable to do more than register his chagrin. That does not do a lot for investors who were victimized by the shell game Bank of America engaged in, but it may serve as further evidence that the SEC needs to seriously rethink what precisely it is seeking in such settlements. Too often, they seem cleverly designed to create the illusion that justice is being served, rather than fostering policies that promote investor confidence in the capital markets and stand the test of garden-variety common sense on Main Street.
Judge Rakoff gave his verdict on that score, calling the settlement “half-baked justice, at best.” We see it more like a pie in the face of shareholders, despite the efforts of a plain-speaking judge to do his best to prevent it.