On August 3, 2009, the SEC filed a complaint alleging that Bank of America (BAC) had lied to its shareholders in a November 3, 2008 proxy statement soliciting support for its $50 billion buyout of the investment bank Merrill Lynch. In the statement, BAC said that Merrill had agreed not to pay any bonuses or other discretionary compensation to its staff before the deal closed without BAC’s consent. What BAC did not tell its shareholders was that it had already agreed to $5.8 billion in such bonuses which represented a significant fraction of the asking price.

With the August 3 filing the SEC and BAC proposed a final consent judgment to Jed Rakoff, a federal judge for the Southern District of New York. In it, BAC without admitting or denying the accusations, was enjoined from making future false statements in proxy sollicitations. It further agreed to pay a fine to the SEC of $33 million. On September 14, 2009, after having requested and received supplementary submissions from both sides, Judge Rakoff rejected the agreement and excoriated both BAC and the SEC. He noted that the SEC had failed to go after those at BAC or its lawyers who were responsible for the lie. Instead it revictimized BAC shareholders (and US taxpayers; BAC has received a bailout of some $40 billion from the US government) by requiring them to pay, on top of the $5.8 billion they had already lost as a result of the lie, a further $33 million as a penalty. Not only were the wrong people paying the fine but the fine was not commensurate with the multi-billion dollar size of the lie. Judge Rakoff also observed that BAC’s undertaking not to lie in the future on proxy statements was meaningless. Since the company had not admitted to lying in the present case, there was no measure to determine contempt of the court’s order in the future. In other words, if BAC had admitted to doing nothing wrong, how could it be enjoined from doing what it had done again? The admission of a wrong act is necessary to the court so it can point to that act and say, “Don’t do that again.” In the absence of such an admission, there is nothing for the court to point to.

In closing, Judge Rakoff wrote that the consent judgment he had vetoed

“suggests a rather cynical relationship between the parties: the S.E.C. gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger; the Bank’s management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but also of the truth.”

He ordered the SEC and BAC to be ready to go to trial on February 1, 2010.

What makes Judge Rakoff’s decision all the more telling is that, also on September 14, 2009, Obama was giving a speech in New York on financial reform in which he called for greater regulation of financial institutions. The speech was a restatement of Obama’s previous weak proposals for reform, a weakness which was underscored by Judge Rakoff’s decision on the same day in the same city.