Judge Jed Rakoff Hangs Tough

When we last left U.S. District Judge Jed Rakoff, he had refused to approve a settlement between Bank of America and the Securities and Exchange Commission (SEC) in the form of a $33 million fine to be paid by Bank of America. When I last wrote about this, I observed that Rakoff was less interested in arguing over the amount of a fine and more interested in what I called "the usual issues that occupy a judge." I enumerated those issues as follows:

1. Has any wrongdoing taken place?
2. If so, who is responsible for that wrongdoing?
3. If the guilty parties can be identified, how may they best be punished to the satisfaction of the victims of their wrongdoing?

Where questions such as these were concerned, Rakoff was equally fed up with both sides of the story; so he ordered both the SEC and Bank of America to submit better reasons for his accepting the settlement by September 9. It is now September 14; and, according to a story that just came over the Reuters wire, Rakoff is still not convinced. His latest assessment is that the settlement, which both parties still wish to pursue, is a "contrivance" (his word) that (in the words of the Reuters story) "harms shareholders." Where this may now lead is that New York Attorney General Andrew Cuomo is prepared to take Bank of America executives to court on fraud charges.

Under the circumstances, it is interesting to read the context in which Rakoff chose that noun "contrivance." He basically said of the new round of justifications that he had demanded from both Bank of America and the SEC that they:

leave the distinct impression that the proposed consent judgment was 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.

The shareholders Rakoff has in mind are those denizens of Main Street who committed themselves to being depositors and/or investors and are now stuck with paying for the blunders made on Wall Street. So it is that Rakoff has returned to his home base of those three enumerated questions and decided that the only way those questions can be answered will be through a trial, which he is suggesting should begin no later than February 1.

It will be interesting to see how Cuomo chooses to prosecute the fraud in this case. At the very least he is clearly prepared to draw up charges against Bank of America, but where will this leave the SEC? It would seem that they could be charged either separately or jointly on grounds of choosing collusion (that "facade of enforcement") over responsible regulation. Perhaps this will result in some of the uglier truths about Wall Street finally coming to light. Let us hope we have the courage to handle those truths.