The rejection of the proposed $33 million settlement between the SEC and Bank of America (NYSE: BAC) has created a number of interesting scenarios and potential fallout from the decision.
Included with that fallout will be the bringing to the surface of a number of participants in these types of deals to the public in order to be scrutinized: a good thing.
Some of those participants include the SEC, Bank of America, BofA’s lawyers, and other government officials involved in pushing the deal forward – from both the Federal Reserve and the Treasury Department.
Some of the interesting things that could happen would be the scrutiny of the lawyers from BofA, which have been singled out by BofA executives as being behind the actions they took concerning alleged withholding of information on bonuses offered to Merrill Lynch executives before acquiring the company. It could deal with pulling the veil off the inner workings of the deal which would usually be protected by attorney-client privilege, which is the center of the case made by Bank of America executives, that they were simply following the advice of legal counsel. The judge responded to that be asking why the attorneys aren’t being gone after for damages then. This part of the story should get interesting going forward.
The SEC has also come into question about its willingness to make what is being considered by the judge in this case a sweetheart deal which was far below the settlement that should and could have been made, from his view of it. The fallout for the SEC in this case could bring further scrutiny on the agency in future settlement deals, which is its primary way of doing business when issuing penalties upon corporations; especially larger ones. There is also a push to focus more on individuals involved in this case and cases like it with larger corporations, which has usually ended up focusing on penalizing the firm when it is a large company, in contrast to individuals the smaller the company gets. The problem with this is that shareholders of a company get damaged from settlements with huge corporations, based on the company being fined rather than individuals connected to the deeds.
Essentially the ruling by U.S. District Judge Jed S. Rakoff put a spotlight on the SEC being too pragmatic in hammering out this deal, and undermines the purpose of the agency in playing role of being a deterrent to these types of actions. Consequently, SEC Chairman Mary Schapiro will have to testify before the House Oversight Committee on the settlement between the SEC and Bank of America in the latter part of September.
For Bank of America, this will bring unwanted exposure to their role in the matter, even though they’ve cited their attorneys as the source of the actions. No company likes to have any of this type of activity aired, as it brings attention to what could easily be considered – at minimum – irresponsible decisions, and at best – outright deception.
What isn’t being talked about much, but may be one of the more important parts of this overall case, is the inclusion of officials from the Treasury Department and the Federal Reserve who were the forces behind pushing the deal to be done in the first place.
This is where a lot of interesting pieces of the puzzle could come together, and bring forth a transparency about the entire affair that probably would have rather been kept behind the scenes and out of the public eye.
If the various parties are forced to defend their parts in the debacle, we’ll get a rare glimpse at the workings and rational behind how the entire scenario was initiated and played out.
