The SEC hasn’t been doing too well lately. After the revelation that it was played for a fool during five separate investigations into Bernie Madoff’s Ponzi scheme, it’s now had it’s head ripped off by SDNY Judge Jed Rakoff. The plea deal cut with Bank of America to dispose of charges that it lied to its shareholders about $5.8 billion in bonuses paid to Merrill Lynch executes required that BOA pay a fine of $33 million. Of course, that money won’t come from the pockets of the folks who did the lying.
Judge Rakoff, who had to approve the deal, was less than thrilled:
Judge Rakoff, who had to approve the deal, was less than thrilled:
It is not fair, first and foremost, because it does not comport with the most elementary notions of justice and morality, in that it proposes that the shareholders who were the victims of the Bank’s alleged misconduct now pay the penalty for that misconduct. . . . [T]he notion that Bank of America shareholders, having been lied to blatantly in connection with the multi-billion-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.
He rejected the deal and set a trial date. A roar was heard across Foley Square. Now one might suspect, aside from some BOA executives and some really red-faced SEC lawyers, that everyone with half a brain would be thrilled by Judge Rakoff’s principled rejection of the deal (Mike at C certainly was impressed), both from the perspective of “notions of justice and morality,” seldom considered notions in rubber stamping deals, and that someone finally took corporate executives and their very close friends at the SEC to task a year after the Lehman Brothers collapse.
Well, not everyone. Over at Conglomerate, David Zaring stands up for the downtrodden, the SEC lawyers,calling Judge Rakoff’s rejection of the deal “posturing”.
Well, not everyone. Over at Conglomerate, David Zaring stands up for the downtrodden, the SEC lawyers,calling Judge Rakoff’s rejection of the deal “posturing”.
The good judge just turned down the plea deal between the SEC and BofA on its communications with shareholders on the Merrill deal. And he set a trial date. I of course think highly of Rakoff, and know that judges have to approve consent decrees that involve future judicial oversight (which makes for plenty of approvals, as they almost all do), but I’ve never understood this sort of posturing. The parties aren’t going to go to trial, and the fact that the SEC would like to come back to court if BofA fails to meet the terms of its deal is hardly a great way in to close judicial supervision of those terms. After all, what else is the SEC supposed to do, throw up its hands? What if divorce courts started doing something similar?
Where’s the deference, Zaring demands to know.
But Zaring’s real issue doesn’t appear to be the rejection of the plea deal per se, but that Rakoff set the matter down for trial. As he says, the SEC isn’t going to trial. Why? Because they don’t wanna. That’s why they cut the deal, duh.
There’s a reason all that money is spent on building courthouses, with their marble hallways and wood-paneled courtrooms. It’s to try cases. If BOA executives lied to its shareholders in order to scam their approval of a deal, then this is the place to resolve it if the people who did wrong are to be held accountable. The fact that the SEC found a quick and dirty way around the problem, that the particular individuals who engaged in the fraud will shift their liability to the shareholder victims is not a reason to avoid a trial. That the SEC lawyers don’t really want to be put to the test of trial means that we need new SEC lawyers.
Zaring calls for deference, but there is a threshold of sanity that must be met before one hands over decision-making to some collusive deal that is so fundamentally absurd that it’s laughable. What if the prosecution and defense cut a plea in a rape case that required the victim of the rape to serve the time? But the prosecution agreed, so they are due deference, right?
That Judge Rakoff’s eminently sane rejection of this deal comes under attack for its failure to let the SEC have its way reflects a fundamental misapprehension by the SEC of its reason for being. It exists neither to serve the financial industry, as friend and protector, nor to meet the expectations of lawyers who are, for a brief period in their career, in its employ. And thankfully, Judge Rakoff said “no”.
Zaring may be absolutely correct that the SEC lacks the gumption to go to trial, and won’t be forced into the well no matter what Judge Rakoff orders. But that’s an indictment of the SEC as well as Bank of America. Maybe we’ll need two trial dates instead of one,
When I was a government lawyer and I ran into angry judges for this or that reason, I always wanted a showdown. “Fine, judge, dismiss the case, because we aren’t trying it,” I dreamed myself saying, or “go ahead, hold the United States in contempt, I dare you, but we’re doing things the way we want to, not they way you want to.” My superiors always overruled me, thankfully for the rule of law, but really, parsing deals like Rakoff is doing here does no one any good. Even if he just wants to change the fine and get more disclosures out of it all. I prefer our litigant-driven system of justice to what they have in, you know, France.Forget about the whole collusion aspect, the pocket agency, the friendly deal. Forget that the SEC is a government agency whose existence is to protect the public, and that this deal stinks from the word “go” by making the victims pay the fine for the harm done them. If the SEC says so, who is Judge Rakoff to say “boo”. Really, this is the myopic view of the almighty government lawyer, certain that his “litigant-driven” system entitles a lawyer with a government ID to do as he pleases.
But Zaring’s real issue doesn’t appear to be the rejection of the plea deal per se, but that Rakoff set the matter down for trial. As he says, the SEC isn’t going to trial. Why? Because they don’t wanna. That’s why they cut the deal, duh.
There’s a reason all that money is spent on building courthouses, with their marble hallways and wood-paneled courtrooms. It’s to try cases. If BOA executives lied to its shareholders in order to scam their approval of a deal, then this is the place to resolve it if the people who did wrong are to be held accountable. The fact that the SEC found a quick and dirty way around the problem, that the particular individuals who engaged in the fraud will shift their liability to the shareholder victims is not a reason to avoid a trial. That the SEC lawyers don’t really want to be put to the test of trial means that we need new SEC lawyers.
Zaring calls for deference, but there is a threshold of sanity that must be met before one hands over decision-making to some collusive deal that is so fundamentally absurd that it’s laughable. What if the prosecution and defense cut a plea in a rape case that required the victim of the rape to serve the time? But the prosecution agreed, so they are due deference, right?
That Judge Rakoff’s eminently sane rejection of this deal comes under attack for its failure to let the SEC have its way reflects a fundamental misapprehension by the SEC of its reason for being. It exists neither to serve the financial industry, as friend and protector, nor to meet the expectations of lawyers who are, for a brief period in their career, in its employ. And thankfully, Judge Rakoff said “no”.
Zaring may be absolutely correct that the SEC lacks the gumption to go to trial, and won’t be forced into the well no matter what Judge Rakoff orders. But that’s an indictment of the SEC as well as Bank of America. Maybe we’ll need two trial dates instead of one,
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Very enjoyable post. As an aside, the “litigant-driven system of justice” while a great system of justice (so long as people litigate), is a poor system for the regulation of financial institutions.
David Zaring sounds like a “fine” government lawyer. I’m glad he’s gone.
The rest of Zaring’s post evidences an ignorance of separation of powers – Con Law 101.
Did Zaring even read Radkoff’s order? It’s not rocket science. Here is what happened, Zaring:
1. BOA executives did not disclose material facts;
2. Because of 1., BOA shareholders suffered a loss.
3. Therefore, BOA shareholders – rather than the executives who made the decision in 1. – will pay the SEC a fine.
Um…Thank your god of choice that there’s at least one federal judge who understands basic logic. You do not punish the people you are supposed to protect. Here, the SEC attempted to punish the same shareholders whose interests the SEC was claiming to vindicate.
That Zaring would defend the SEC says more about Zaring and the SEC than it does Judge Rakoff.