SEC v. Bank of America Corp.: Ruling on Second Settlement Imminent; Judge Rakoff: Bull in a China Shop

Judge Rakoff is scheduled to rule on the second settlement submitted by the SEC and BofA for Court approval this coming Monday, February 22. It is apparent from the submissions made by the parties since my post of February 12 that both the SEC and the Bank are saying to the Judge “Enough, Already,” and want him to get on with it and approve the settlement. I still believe he will do so, but lifetime tenure does something for federal judges – it makes them very, very independent.

A. The SEC’s Supplemental Statement of Facts

In response to the Judge’s February 11 order, both the SEC and the Bank have, through counsel, corresponded with Judge Rakoff, jointly submitted the evidentiary record on issues requested by the Judge, and the SEC has submitted a Supplemental Statement of Facts (the “Statement”) summarizing the evidentiary record. By the Statement, the SEC confirms its conclusions that:

• General Counsel Timothy Mayopoulos advised management of the Bank, after conferring with the Wachtell firm, that the Bank was not required to make additional disclosure to its shareholders concerning Merrill’s forecasted fourth-quarter losses before the shareholder meeting held on December 5, 2008;

• Wachtell supported Mayopoulos’s advice; and

• Mayopoulos’s firing on December 10, 2008 was “for reasons which had no connection to his legal advice or any other aspect of his job performance.” Statement ¶2.

The Commission does not provide any argument in the Statement. By its detail, however, the Commission reinforces its conclusion that there is no basis for a finding of bad faith or scienter by Mayopoulos or Wachtell in the legal advice they gave the Bank.

While the evidence cited by the Commission on Mayopoulos’s firing supports the Commission’s conclusion on the absence of any motive to terminate Mayopoulos for any legal advice he gave, the termination does illustrate the brutality of corporate politics. According to the evidence developed by the Commission, Mayopoulos was fired to make room for Brian Moynihan, then BofA’s head of its investment banking division (and now CEO of the Bank).

As a result of the pending merger with Merrill, Moynihan’s position was going to be eliminated, and John Thain, Merrill’s CEO, was to take over the combined entity’s investment banking operations. The BofA board of directors balked at Moynihan’s pending departure, urging Ken Lewis to find a suitable position for him. Lewis decided to place Moynihan in Mayopoulos’s position as General Counsel of the Bank, even though Moynihan had not practiced for years and his bar membership was not then even active.

So, according to the evidence developed by the SEC, Mayopoulos was fired not by reason of his performance, loyalty, or competence, but simply to make room for an officer that Lewis was prepared to lose but the Board of Directors of the Bank wanted to retain.

B. Cuomo’s Office’s Response

By its letter dated February 16, 2010 to the SEC, Cuomo’s office rejected the Commission’s request to turn over transcripts of the testimony of Mayopoulos and others given by them to Coumo’s office. Coumo's office stated that turning over such materials would adversely affect that office’s prosecution of its case against the Bank, Lewis, and Joe Price, the Bank’s former CFO.

In response to this letter, Judge Rakoff jumped in with his Order of February 17, stating his desire to see the requested materials to enable him to determine “whether the conclusions on which the S.E.C. premises its proposed settlement have an adequate basis in fact or are materially at variance with other sworn testimony.” Order at 2. Given the time constraints, the Judge simply requested that Cuomo’s office “voluntarily” produce the materials to the Court, suggesting that if Cuomo’s office deemed it necessary, the production could be made “ex parte,” meaning to the Court alone, without copying the SEC or BofA.

Cuomo’s office took up the suggestion and submitted the materials ex parte to the Court by its letter dated February 19.

C. BofA’s Response

BofA initially responded to Judge Rakoff’s Order of February 11 by its letter to the Court of February 16. Barely disguising its irritation, the Bank “respectfully” pointed out to Judge Rakoff that the second proposed settlement “was the result of arm’s length negotiations” between BofA and the Commission and, in the opinion of the Bank, “no changes” were necessary to the proposed consent judgment submitted by the Commission and the Bank to the Court. Nevertheless, the Bank stated its agreement to the Judge’s request for Commission and, possibly, Court involvement in the appointment of an independent auditor to assess the Bank’s disclosure controls and procedures and the retention of disclosure counsel for BofA’s audit committee.

But the Bank balked at Judge Rakoff’s request that the Commission and the Court participate in the selection of an independent compensation consultant for the Board’s compensation committee. The consent judgment submitted by the SEC and the Bank provides for the retention of an independent compensation consultant by the compensation committee, to be selected solely by the compensation committee. The Judge requested in his February 11 order that the consultant be acceptable to both the SEC and the Court and that, if the Bank and the SEC could not agree on the consultant, the Court would make that choice. That request irritated the Bank:

“. . . we do not believe that the third proposed change to the Consent Judgment is necessary to achieve or tailored to the remedial objectives of the settlement, and we further believe that this proposed change would impose on the SEC a substantive role that the SEC expressly does not seek and that is outside the province of the SEC and the Court.”

BofA letter of February 16, at 3 (footnote omitted).

In response to Cuomo’s office’s turning over materials, ex parte, to the Court, the Bank submitted its letter of February 18 in protest. The Bank’s position is that evidence developed in other forums and not in the pending actions against the Bank before Judge Rakoff should not be considered by the Court. This is not a frivolous complaint, and could serve as the basis for any appeal by the Bank to Judge Rakoff’s decision on the settlement, assuming he does not approve it.
____________________

If Judge Rakoff does not approve the second settlement, he will certainly confirm his reputation as a maverick. Without familiarity with the procedural hurdles that might confront the Commission or the Bank in challenging any rejection of the settlement by the Judge, one would think that if he rejects the settlement one or both of the parties will seek review of his decision by the Second Circuit and/or seek to disqualify Judge Rakoff from presiding over the trial of this case. It is not too much to ask how Judge Rakoff could maintain his impartiality if, as a result of his detailed review of deposition transcripts and other evidence, he concludes that the settlement should be rejected because the Commission has failed to name officers of the Bank and/or its counsel for securities law violations.