Download - 09-08-25 SEC v BAC (1:09-cv-06829) - Dkt #013 - Order in re: Proposed Settlement then before the Court

8/8/2019 09-08-25 SEC v BAC (1:09-cv-06829) - Dkt #013 - Order in re: Proposed Settlement then before the Court

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Case 1:09-cv-06829-JSR Document 13 Filed 08/25/2009 Page 1 of 5

UNITED STATES DISTRICT COURTSOUTHERN DISTRICT OF NEW YORK------------------------------------xSECURITIES AND EXCHANGE COMMISSION,

P la in t i f f ,09 Civ. 6829 (JSR)-v -

ORDERBANK OF AMERICA CORPORATION,

Defendant .------------------------------------xJED S. RAKOFF, U.S.D.J .

This Court has the obl iga t ion , within ca re fu l l y prescr ibedl im i t s , to determine whether the proposed Consent Judgment se t t l i ngt h i s case i s f a i r , reasonable , adequate , and in th e p ub lic i n t e r e s t .To t h a t end, the Court heard argument on August 10, 2009 and, havingi n su f f i c i en t informat ion to make an in fo rmed assessment , di rec ted thepa r t i e s to make i n i t i a l wri t t en submissions on August 24, 2009responding to ce r t a in a reas of the Cour t ' s concern, to be fol lowed byfu r t he r wr i t t en submissions on September 9, 2009. The Court has nowrece ived the i n i t i a l submissions and expresses i t s g ra ti tu de tocounsel fo r the pa r t i e s fo r t h e i r helpfu l responses .

However, review of the i n i t i a l submissions ra i se s a fewadd i t iona l i s sues t ha t the Court di rec t s the pa r t i e s to address(along with responding to t h e i r respec t ive adversa ry ' s i n i t i a lsubmission) in the p apers th ey wi l l be submit t ing on September 9,2009.

The proposed Consent Judgment ca l l s fo r a $33 mi l l i onpenal ty , the burden of which wi l l f a l l d i r ec t l y on t he s ha re ho ld er s


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of Bank of America (and arguably i nd i rec t ly on u.s. t axpayers ) . Yetthe gravamen of the vio la t ion asser ted in the Complaint i s t h a t Bankof America, through i t s management, e f f e c t i ve l y l i ed to its ownsha reho lde rs . The Secu r i t i e s and Exchange Commission ("SEC"), in i t so f f i c i a l Statement Concerning Financ ia l Pena l t i e s i s sued in 2006,informed Congres s an d the publ i c t ha t i t s o f f i c i a l po l i cy was t h a t"Where sha reho lde rs have been vic t imized by the vio la t ive conduct , o rby the re su l t ing negat ive e f f e c t on the en t i t y fo l lowing i t sdiscovery , the Commission i s expected to seek pena l t i e s from culpablei nd iv idua l of fenders ac t ing fo r the corpora t ion ." Such pena l t i e s ,u n lik e c orp or ate f ines , would not come out of the shareho lders 'pockets .

In i t s August 24 t h submission, the SEC repea ted ly reconfi rmsi t s cen t r a l a ss er t io n th a t "Bank of America ' s [proxy] s ta tement wasmate r i a l l y fa l se and misleading because it in dic ate d to sha reho lde rst h a t Merr i l l [Lynch] would only make ' r equ i r ed ' payments to i t semployees, such as sa l a ry and bene f i t s , bu t would not payd i sc re t i ona ry year -end bonuses , [whereas] [ i ]n fac t , Bank of Americaexpress ly had agreed to al low Merr i l l to pay up to $5.8 b i l l i on ind i sc re t i ona ry year -end bonuses ." Memorandum of P l a i n t i f f Secur i ty andExchange Commission in Support of Entry of the Proposed ConsentJudgment ("SEC Br." ) a t 20. Yet the same submission a s s e r t s t ha t theSEC, desp i t e i t s 2006 pol icy quoted above, decided not to br ingcharges aga in s t cu lpab le ind iv idual of fenders because a l l the

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company's witnesses "s t a t ed t ha t they r el ie d e n ti re ly on counsel todecide what was o r was not disc losed in the proxy s ta tem en t." Id . a t25. Fur the r , the SEC a sse rts th at it was unable to t e s t t h i s

asse r t ion because "Bank of America has not waived the a t to rney-c l i en tp r iv i l ege [and] [a]s a r e su l t , the i nves t i ga t i ve record does notinc lude any spec i f i c r a t i ona l e as to why the d i sc lo su re schedule[ re ve al in g th e bonuses] o r i t s contents were not disc losed in theproxy s ta tem en t." Id .

This i s puzzl ing. I f the re spons ib le o f f i c e r s of the Bank ofAmerica, in sworn tes t imony to the SEC, a l l s ta te d th at " they r e l i eden t i r e ly on counse l , " t h i s would seem to be e i t h e r a f l a t waiver ofpr iv i l ege or , i f p r iv i l ege i s maintained , then en t i t l ed to no weightwhatever , s ince the s ta tement cannot be t e s t ed . In a ss er t in g th a t nowaiver occur red , the SEC c i te s ju s t one case , John Doe Co. v. UnitedSta te s , 350 F.3d 299 (2d Cir . 2003), which, on f i r s t r ead ing a tl e a s t , seems hard ly to suppor t such a broad asse r t ion a pp lic ab le tothe f ac t s here .

I f the SEC i s r i gh t in t h i s asse r t i on , it would seem t h a t a l la corpora te o f f i ce r who h as p ro du ce d a f a l se proxy s ta tement needo f f e r by way of defense i s t ha t he o r she r e l i ed on counsel , and, i fthe company does no t waive the p r iv i l ege , the asse r t ion wi l l never bet e s t ed , and the cu lpab i l i t y of both the corpora te o f f i ce r and thecompany counsel wi l l remain beyond sc ru t iny . This seems so a t warwith common sense t h a t the Court wi l l need to be shown m ore than a

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s i n g l e , d i s t i n g u i s h a b l e c a s e t o be convinced t h a t it i s , indeed, t h elaw. It a l s o l e a v e s open t h e q u e s t i o n o f whether , if it was a c t u a l l yt h e lawyers who made t h e d e c i s i o n s t h a t r e s u l t e d i n a f a l s e proxys t a t e m e n t , t h e y should be h e l d l e g a l l y r e s p o n s i b l e .

The Court r e c o g n i z e s t h a t t h e Bank o f America, havingp r e v i o u s l y been p r e c l u d e d by i t s t e n t a t i v e s e t t l e m e n t with t h e SECfrom denying t h e Complaint ' s a s s e r t i o n s , has now, i n response t o t h eC o u r t ' s d i r e c t i o n t o provide t h e Court with t h e Bank ' s own v e r s i o n o ft h e f a c t s , a s s e r t e d t h a t t h e proxy s t a t e m e n t was n e i t h e r f a l s e n o rm i s l e a d i n g . I t s p o s i t i o n , however, i s t h a t , r a t h e r t h a n p u t i t sa s s e r t i o n s o f innocence t o t h e t e s t , it decided t o spend $33 m i l l i o no f s h a r e h o l d e r s ' money t o s e t t l e t h e case "so t h a t Bank o f Americawould n o t face t h e unnecessary d i s t r a c t i o n o f a p r o t r a c t e d d i s p u t ew i t h one o f i t s p r i n c i p a l r e g u l a t o r s a t a t ime when t h e f i n a n c i a li n d u s t r y c o n t i n u e s t o face d i f f i c u l t c h a l l e n g e s stemming fromu n c e r t a i n and t u r b u le n t c o n d i t io n s . " Memorandum o f Law on Behalf o fBank o f America Corpora t ion a t 19. Whatever t h i s c h a i n o f vaguee x p r e s s i o n s may mean, if it i s i n t e n d e d t o s u g g e s t t h a t Bank o fAmerica s e t t l e d t h i s case t o c u r r y f a v o r with t h e SEC o r t o avoidr e t a l i a t i o n by t h e SEC, t h e Court needs t o know t h e s p e c i f i c s .

More immediately , if t h e Bank o f America i s c o r r e c t t h a t t h eproxy s t a t e m e n t was n e i t h e r f a ls e nor m i sl ea din g, t h e i s s u e s o fp r i v i l e g e l imned above have l e s s r e l e v a n c e . Nonetheless , because iti s t h e Bank ' s p r i v i l e g e t h a t i s a t i s s u e , and t h e Bank 's lawy ers who

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a re sa id to have produced the a lle ge dly f al se proxy s ta tem en t, th eBank, l ike the SEC, i s di rec ted in the fu r t he r submissions due onSeptember 9 t h , to provide i t s views on the i s sues r a i sed in t h i sOrder.

SO ORDERED.

Dated: New York, New YorkAugust 25, 2009

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Download - 09-08-25 SEC v BAC (1:09-cv-06829) - Dkt #013 - Order in re: Proposed Settlement then before the Court

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