Hot stuff! So-o hot; very hot. Despite both the SEC and BofA asking the Court in their briefs last week to approve the $33 million dollar settlement reached in August, the NYTimes blog Dealbook reported at lunch that Judge Rakoff has said “No.” The Opinion is here, but suffice it to know Rakoff focuses his attention on the BofA shareholder. Rakoff wonders how a settlement for acts committed against BofA shareholders is remedied by a payout by those same shareholders – ironically, where the BofA management who decided to pay are presumably the same BofA management who are alleged to have committed the acts. Rakoff acknowledges that deference is typically and appropriately shown to settlements achieved between parties, but then cites case law that empowers courts to scrutinize and deny them. Rakoff concludes the $33 million “proposed consent judgment is neither fair, nor reasonable, nor adequate.”Have I mentioned how hot this is?
The Judge elaborates. It’s not fair because it smacks of injustice: why should the victims of the act pay the penalty? Rakoff even goes so far as to question, that if BofA executives were relying on counsel’s advice, why not have the attorneys pay the penalty? Even better, Rakoff calls out BofA for not providing the information the Judge asked for in August: “precisely how the proxy statement came to be prepared, exactly who made the relevant decisions as to what to include and not to include so far as the Merrill bonuses [are] concerned.” In a fn. on page seven, Rakoff’s language suggests he considers the $33 million trivial. Rakoff in fact characterizes the settlement as a “contrivance.”
Rakoff continues: the judgment is unreasonable (for all the reasons it is unfair, but also) because the arguments contained in the briefs don’t match the parties' actions. The Court cites an example: the settlement would close the matter, but the SEC maintains in one place it has the evidence to meet the mental element required by law, but in another place maintains it does not. More fn.s: did government coercion have anything to do with this? Why hasn’t the advice of counsel argument been fully tested? Rakoff then beats it home: the injunctive relief requested (that BofA cannot issue false proxies in the future) is a joke >> BofA maintains they did nothing wrong and so would be free to issue proxy statements identical to the one at the heart of this matter (thereby resolving nothing).
Rakoff’s inadequacy reasoning: $33 million in light of a multi-billion dollar merger (Aka., please?!).
We’re off to trial, Baby! Rakoff set a February 1, 2010 date and requested the Parties submit a jointly proposed Case Management Plan within a week.
Hat tip: Louise Story at NYTimes.
Here's the part I thought was most interesting (and pertinent to this blog):
ReplyDelete"The S.E.C., while also conceding that its normal policy in such situations is to go after the company executives who were responsible for the lie, rather than innocent shareholders, says it cannot do so here because '[t]he uncontroverted evidence in the investigative record is that lawyers for bank of America and Merrill drafted the documents at issue and made the relevant decisions concerning disclosures of the bonuses.' Id. BUT IF THAT IS THE CASE, WHY ARE THE PENALTIES NOT THEN SOUGHT FROM THE LAWYERS?" (all caps emphasis added).
yea - why NOT the lawyers? and why aren't more folks discussing THAT aspect of this mess? If this was fraudulent and the lawyers not only failed to report it (in violation of up-the-ladder reporting rules in SOX), but in fact, facilitated the fraud, is this not a HUGE ethical violation that could and perhaps should cost folks their very legal careers?
Fraud is never in the client's best interest. That could (and should) be one of the lessons here.
In fact, to emphasize his gruff against the lawyers, the judge goes on to specifically note that BOA "never actually provides the Court with the particularized facts taht the Court requested, such as precisely how the proxy statemetn came to be prepared, exactly who made the relevant decisions as to what to include and not include so far as teh Merrill bonuses were concerned, etc."
ReplyDeleteOne would expect BOA to argue this stuff is privileged/confidential/work product, etc. After all, what is "material" (and hence needs to be disclosed) is a legal question on which executives would (rightly) rely on legal advice. If reliance on advice of counsel comes up as a defense, good bye privilege and hello legal malpractice suit.
Anyway, it's a possibility. There is sometimes a fine and often blurry line betweeen law and business in securities practice, and this case could become a very good study about that line.
See also footnotes 2 & 3...
ReplyDeleteHi Anon,
ReplyDeleteThanks for your comments.
I think people are talking about whether the attorneys should be held liable ... it's just a conversation that only a few professional groups know to bring up, though. Namely: bankers and lawyers (and I doubt either one of them is going to assume this sort of responsibility).
Particularly considering that one of the BofA defenses may really rock the practice if it is overturned; that defense: this is just the way it is done (adverse info is kept undisclosed in private schedules apart from the proxy statements but referenced by the proxy statements).
As a young attorney, I have to admit the NYAG's argument resonates with me: that the proxy, which precedes the vote, should clearly inform the shareholder of pertinent info. But not yet accumulating practice experience, I don't know if that's an academic ideal ...
But people are starting to talk. An ATL thread a few weeks ago raised the question of attorney liability, and next week I'm attending a Bar eventthat is convening to discuss the issue.
I agree with you - as practitioners, we have a responsibility to be ethical, and inform our clients about the consequences of their choices. But then the choice is theirs, right? Also: as attorneys, isn't our job to make possible what the client wants?
I don't know the answers - and I don't think the legal community does right now, either ... which means a very interesting several months ahead (not to mention blawg posts).
Thanks again - Sls.