Bank of America to SEC: It's the Lawyers' Fault
How the judge's rejection of proposed settlement may impact other cases.
In its complaint -- which, in accordance with the usual practice in settlements negotiated with the SEC, was filed in federal court on the same day that the settlement was proposed to the Court and publicly announced -- the SEC alleged that Bank of America's proxy statement seeking shareholder approval of the acquisition falsely "represented that Merrill had agreed not to pay year-end performance bonuses or other discretionary incentive compensation to its executives prior to the closing of the merger without [B of A's] consent [when] [i]n fact, contrary to the representation, [B of A] had agreed that Merrill could pay up to $5.8 billion" in such bonuses and compensation for 2008. B of A denied the allegations throughout the proceedings and alleged that its disclosures complied with securities law requirements. I have no knowledge of the underlying facts and express no opinion on the accuracy of the SEC's charges.
In rejecting the proposed settlement -- which included a payment by B of A of $33 million and B of A's consent to a court-ordered injunction in which B of A, while neither admitting nor denying the SEC's allegations, agreed not to make future false statements in proxy statements -- Judge Rakoff ripped the SEC in exceedingly strong language for failing sufficiently to pursue the factual basis for its allegations and failing to seek relief against B of A's management (only B of A itself was sued), and failing to push harder to determine whether claims should have been brought against B of A's outside counsel -- who B of A claimed made the decisions regarding what was required to be disclosed in the proxy statement.
The place to begin the discussion of the potential impact of Judge Rakoff's Memorandum Order is to explain why the settlement of an SEC enforcement action requires approval by a United States District Court Judge. Most litigation doesn't require judicial approval. If you sue me or I sue you on any ground whatsoever, we can subsequently agree to settle the suit without the approval of anyone. Normally all the parties need do is execute and file a stipulation of settlement and dismissal (thereby closing the court docket for the case) and, if they're sentient, exchange mutual releases. No one else (except perhaps insurance companies if coverage for the potential loss has been sought by the defendant) need even be informed of the settlement.
But suits brought by government agencies are different, as are class actions brought on behalf of hundreds or even thousands of absent class members. In such cases, the courts are charged (statutorily in the case of class actions and particularly in the case of federal securities fraud class actions) with the responsibility of determining whether the proposed settlement is fair, reasonable and adequate. As Judge Rakoff points out in his Memorandum Order, in such cases, the court usually defers to the parties and their counsel upon their representation that sufficient discovery of the facts has taken place, that the parties have bargained at arms-length and in good faith, and that the settlement represents a fair resolution of the lawsuit taking those and other factors (such as the ability of a defendant corporation to pay more) into account. Here, Judge Rakoff concluded that the proposed settlement was neither "fair," "reasonable," or "adequate."
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