Half-Baked Justice for Shareholders

Doesn’t it just make you crazy when the regulators don’t protect the people they are supposed to protect while at the same time the corporate barons seem to be getting away with another misdeed?

Case in point, the recent settlement between the Securities and Exchange Commission (the non-protective regulators) and the Bank of America (the corporate barons) regarding what amounts to fraud when BofA asked its shareholders to approve buying Merrill Lynch.

According to the Associated Press, the SEC accused Bank of America of failing to disclose to shareholders that it had authorized Merrill to pay up to $5.8 billion in bonuses to its employees in 2008 even though the investment bank lost $27.6 billion that year. The shareholders approved the acquisition and then discovered they were on the hook for the billions in bonus money.

This past Monday, a federal judge approved a $150 million settlement between the SEC and the Bank of America, which ended the civil charges against Bank of America.

But, according to the Associated Press, U.S. District Court Judge Jed S. Rakoff called the settlement, “half-baked justice at best” and said it was approved with the court “shaking its head.”

Judge Rakoff said the new deal’s greatest defect “is that it advocates very modest punitive, compensatory and remedial measures that are neither directed at the specific individuals responsible for the nondisclosures nor appear likely to have more than a very modest impact on corporate practices or victim compensation.”

BofA senior management failed at its job, which was to take care of the people who own the company, its shareholders. Judge Rakoff commented that a settlement that is essentially a $150 million fine “appears paltry.” He went on to say that he was also bothered that the fine penalizes the shareholders for what was, “in effect if not in intent, a fraud by management on the shareholders.”

So the SEC, which is supposed to protect all shareholders and ensure that our markets are fair, is punishing the shareholders of Bank of America for what their management (who are also supposed to put shareholders first) did to — wait for it — the shareholders!

The big losers in all this are the shareholders, obviously. You can only hope that in time, the Bank of America/Merrill Lynch entity will prosper and profit and shareholder value will improve.

But there are other losers in this mess: Fans of regulation shouldn’t be pleased. The regulator failed to stop the initial infraction and then proved ineffective at policing the matter. Critics of regulation will be upset because the regulator continues in its ineffective and unnecessary ways, costing taxpayers money to run and soaking Corporate America with useless fines. Taxpayers are losers since they do, in fact, pay to keep the SEC (and the federal court system that adjudicated this mess) going.

The only winners in this jumble are Bank of America’s senior management. They get a slap on the wrist and a minor fine they don’t even have to pay. Half-baked? More like a soufflé that’s collapsed into itself in a mass of uncooked goo.

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2 Responses to Half-Baked Justice for Shareholders

  1. Felix Q says:

    I can’t agree with you more. When are the SEC going to wake up and for that matter The Senate Banking Committee. They steal millions and billions and get a measly fine. A guy steals a loaf of bread and gets five years. One law for the rich and powerful another for the man in the street.

  2. This is a fantastic blog, Geoff. So glad you are doing this AND I can’t wait for your book to come out.

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