SEC v. BofA: Judge Rakoff Rejects the Settlement (Part 5)

The opinion was remarkable in its candor.  In characterizing what he believed really happened, Judge Rakoff had this to say:

• Overall, indeed, the parties’ submissions, when carefully read, leave the distinct impression that the proposed Consent Judgment was a contrivance designed to provide the S.E.C. with the facade of enforcement and the management of the Bank with a quick resolution of an embarrassing inquiry – all at the expense of the sole alleged victims, the shareholders. Even under the most deferential review, this proposed Consent Judgment cannot remotely be called fair.

So what would happen next?  Litigation.  The only way for the truth to come out and the two sides to resolve very different characterizations of the same case.  As Judge Rakoff noted:

• Yet the truth may still emerge. The Bank of America states unequivocally that if the Court disapproves the Consent Judgment, it is prepared to litigate the charges. BofA Reply Mem. at 5. S.E.C., having brought the charges, presumably is not about to drop them. 

It is the right outcome.  When settlements occur, they invariably involve a statement that the guilty party neither admits nor denies the allegations.  The Commission, however, views these settlements as admissions of wrongdoing.  They do not expect parties to assert innocence once the settlement has been approved.  Sometimes they do and there is little the Commission can do except to ask to have the settlement vacated (which almost never happens). 

But when a party asserts innocence in advance, it makes the proposed settlement a charade.  In this case, when BofA made the first filing and professed innocence, the Commission should have immediately announced that the settlement was off and it would have litigated.  Such an approach would have avoided this opinion of the judge and would have added integrity to the settlement process.  Had Judge Rakoff approved the settlement, it would have looked like government coercion at its worst.  He was right to reject it.  

We have a number of primary materials, including this opinion, posted on the DU Corporate Governance web site.

Comments

[Herrick Lidstone]

It appears that BofAm may have hoisted itself on its own petard. Under the consent agreement (and the settlement if it had been entered), the Bank could neither admit nor deny the underlying facts. By asking for the briefing, the Court gave the Bank the opportunity to deny everything and proclaim its innocence, notwithstanding the consent agreement not to take any position to the contrary. By arguing so strenuously rather than taking the "risks of litigation" business judgment approach as you point out, the Bank gave the court the ability to deny the settlement. Let's see what happens next.