The SEC/BofA Settlement Looks More Forward Than Back -- Will Rakoff Buy It?

The fate of the SEC’s lawsuit against Bank of America is back in Judge Jed Rakoff’s hands.

On the same day New York Attorney General Andrew Cuomo announced he was suing BofA over its disclosures, or lack thereof, surrounding the Merrill deal, the SEC announced it had reached an agreement to settle its case with the bank over basically the same disclosures.

Of course, this is not the first try at getting Rakoff to approve a settlement. So what’s different this time? DealBook’s Deal Professor, Steven Davidoff, with help from Peter Henning, walks through the settlement in full, but we’ll hit the highlights.

Rakoff’s problems with the initial proposed settlement were that the shareholders would be taking the hit — without the BofA authorities taking any responsibility. If something was not disclosed that should have been, Rakoff felt there needed to be accountability.

The new settlement would not result in Ken Lewis & Co. begging for forgiveness for their alleged wrongdoings on the courthouse steps (or anything close), but it does place more oversight on the bank’s future disclosures.

As the Deal Professor notes, the settlement requires, for a three year period, the use of outside monitors to review 10-Ks, 10-Q’s and proxies. 

BofA’s CEO and CFO must also personally certify the proxy statements and bank’s financial statements. It sounds good, but Davidoff and Henning note that Bank of America is not likely to file similar proxies anytime soon — but if there’s a Merrill 2.0, things will be covered.

As for the money, the $150 million will be placed in a specified account and distributed to those who were BofA shareholders are the time of the December 2008 proxy vote. There’s also a $1 “disgorgement” for ill-gotten gains, agreed to, we assume, under the same theory of not making shareholders pay further for bank executives’ mistakes.

The Bank does not admit wrongdoing, but does acknowledge that “there is an evidentiary basis for the statements” in the SEC’s Statement of Facts. That is more of a nod than usual, but it’s doubtful that this toothless language will sway Rakoff should he take as harsh a stance as he did the first time. (The settlement does not say which facts to they admit there is evidence to support or who made the decision that lead to those correct facts, which is what Rakoff wanted to know the first time.)

So, the settlement addresses some issues, but it’s more directed toward future behaviour than the alleged past bad deeds.

Will Rakoff give it his stamp of approval? He’s had more time to look at the evidence, and he might think this is the best the SEC can do. Or he may still be unhappy — if the SEC brought this case and thought they could prove it, they should have done so.

The underlying issue here is that disclosure issues are complex (which is why Bank of America hires big brains like Wachtell to help them figure it out) and the SEC has made the decision, for the second time, that going all the way through trial is not the best idea. Forcing parties to go to trial, or drop a case, is unusual — settlements are usually more or less rubber stamped, which is why Rakoff’s move was such a big deal.

The DealBook Professors think Rakoff will not like it, but will eventually “swallow hard and play along.”

Duke professor James Cox seemed a little less certain, telling the WSJ Law blog that, “”Either I’m hopelessly ignorant, or this doesn’t address Rakoff’s concerns at all. Maybe they think Rakoff is getting senile in his old age. But I wouldn’t count on that.”

We tend to think some version of this settlement will be accepted by Rakoff. But he’s his own man, so only time will tell.

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