SEC suffers further humiliation over BofA

Just as the Securities and Exchange Commission was putting its failure to detect the Bernard Madoff fraud behind it, a federal judge has quashed a proposedsettlement between the commission and Bank of America, humiliating the SEC yet again.

In a stunning rebuke on Monday, US district judge Jed Rakoff described last month's proposed settlement between the SEC and BofA over allegations that the bank made misleading statements to shareholders as a "contrivance designed to provide the SEC 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".

Mr Rakoff issued his ruling as talk of financial reform dominated the conversation on Wall Street on Monday, with Barack Obama, US president, using the anniversary of the collapse of Lehman Brothers to call for an overhaul. It was also, coincidentally, the anniversary of BofA's agreement to acquire Merrill Lynch.

Mr Rakoff's order is also a rebuff to Mary Schapiro, the new SEC chairman who has made a priority of revitalising the much maligned agency.

In his order, which called for the SEC to prove its contention that BofA made misleading statements to shareholders about its proposed acquisition of Merrill Lynch last year, the judge blasted the regulator for contradicting its own rules of procedure, adopted in 2006.

The SEC position on financial penalties called for the commission whenever possible to "seek penalties from culpable individual offenders acting for a corporation" rather than from the corporation itself, because the fines paid by corporate offenders were essentially borne by shareholders.

In a court filing last week, the SEC explained its decision to assess the $33m fine on BofA by contending that "lawyers for Bank of America and Merrill drafted the documents at issue and made the relevant decision concerning disclosure of the bonuses".

In his order yesterday, Mr Rakoff wanted to know why the SEC did not then pursue the lawyers involvedin the alleged mis-statements.

Mr Rakoff also criticised BofA's decision to pay a $33m settlement, in spite of its vigorous protests that it never misled its shareholders. The bank's lawyers argued last week thatBofA would have to pay money to defend itself in the matter anyway, so the settlement would at least dispose of the matter quickly.

Mr Rakoff wrote that BofA's decision to pay the $33m implied that the affair was "simply an exercise of business judgment as to which alternative would cost more: litigating or settling".

After casting doubt that litigating the matter would result in legal bills approaching $33m, Mr Rakoff wrote: "It is one thing for management to exercise its business judgment to determine how much of its shareholders' money should be used to settle a case brought by former shareholders or third parties. It is quite something else for the very management that is accused of having lied to its shareholders to determine how much of those victims' money should be used to make the case against the management go away."

Jacob Frenkel, a former SEC attorney, described Mr Rakoff's rebuke of the SEC as among the strongest he had seen, but said BofA was also at fault. "It takes two to tango", Mr Frenkelsaid. "BofA in many respects warrants stronger criticism for abdicating its responsibilities to its shareholders."

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