Judging the SEC

"In challenging the combined wisdom of the SEC and 12 big Wall Street firms, US District Court Judge William H. Pauley III joins his colleague on the bench of the Southern District Court in New York, Jed Rakoff, who gave the commission fits last year as it tried to settle a case with Bank of America Corp. ... 'Closer scrutiny appears to be here.,' says Joseph Grundfest, a law professor at Stanford and former SEC commissioner. 'This is likely not to be viewed as a happy development at the SEC.' ... But the SEC and the banks decided last year that the firewall was no longer needed: Other protections had been put in place, they believed, to assure analysts' independence. ... After the 'April 2003 headlines regarding the "Global Research Analyst Settlement" had faded,' the judge wrote in a 2009 ruling, 'the SEC as well as these defendants were indifferent to the mechanics of restitution'," my emphasis. Nathan Koppel & Ashby Jones at the WSJ, 20 March 2010, link:

http://online.wsj.com/article/SB10001424052748704534904575132093249097852.html. .

Did the SEC and the banks decide? Or did the SEC take orders?

BofA Attorneys Abuse

"Attorneys for Bank of America Corp. [BofA] have agreed to reimburse lawyers for a Miami developer after a US bankruptcy judge in Florida criticized the bank's lawyers for trying 'to score a litigation point' in an ongoing foreclosure dispute. ... The judge scolded the attorneys for putting potentially defamatory fatcs in the pleading without investigating them fully. ... The rebuke is an extreme example of how lenders can end up on the wrong side of a judge when they make mistakes while moving aggressively against delinquent borrowers. It comes as growing stress in commercial real estate is sparking battles between owners and creditors throughout the country. ... [BofA] attorneys apologized in open court for not conferring with Cabi first before including the accusations in their pleadings. 'I regret and apologize on my behalf and on behalf of the bank for the mistakes,' said H. Peter Haveles Jr., a Kaye Scholer [KS] attorney. ... But Cabi, an affiliate of Mexico's Cababie family and the company, Grupo Gisca, filed for Chapter 11 protection the same day, halting any foreclosure attempt. ... Cabi's attorneys have said the bank's refusal to lower the condos' minimum price slowed sales, harming the project", Christina SN Lewis at the WSJ, 10 March 2010, link:

http://online.wsj.com/article/SB10001424052748704145904575111912605562920.html.

We know KS. Here's a link to my 31 January 2009 post: http://skepticaltexascpa.blogspot.com/2009/01/sdnys-lazarus.html. What will happen to KS from this? Likely nothing.

Ken Lewis Scapegoat-3

"A federal judge harshly criticized but approved a $150 million settlement between Bank of America Corp. and the [SEC], resolving claims the bank should have disclosed billions in losses at Merrill Lynch & Co. before it was acquiired by the bank. US District Judge Jed. S. Rakoff on Monday said the fine was 'paltry' when considering the Merrill merger 'could have been a bank-destroying disaster if the US taxpayer had no saved the day.' He faulted the bank for 'hiding material information from its shareholders' and the SEC for being 'content with modest and misdirected sanctions'," Dan Fitzpatrick, Kara Scannell & Chad Bray at the WSJ, 23 February 2010, link:

http://online.wsj.com/article/SB10001424052748704454304575081373576395894.html.

This is nonsense. Could the SEC have fined the Treasury or the Fed?

SEC v. Cuomo

"In a swipe at New York Attorney General Andrew Cuomo, the [SEC] said in a court filing that the December 2008 firing of Bank of America [BofA] Corp.'s general counsel had nothing to do with his opinion about ballooning losses at Merril Lynch & Co. just before the securities firm's takeover by the giant bank. The SEC's court filing sets up a showdown between two securities regulators whose relationship has been fraught with tension for years. ... Mr. Cuomo alleged in a separate complaint filed last month that Timothy Mayopolous, [BofA's] former general counsel, was ignored by another executive when he tried to discuss Merrill's mounting losses and then terminated the next day. ... Meanwhile the swift action by Messrs. Spitzer and Cuomo to take on Wall Street occasionally has left the SEC looking flat-footed. The divergent stances in the [BofA] case could portend trouble for cooperation on other cases", Kara Scannell & Dan Fitzpatrick at the WSJ, 18 February 2010, link:

http://online.wsj.com/article/SB10001424052748703444804575071372283031624.html.

That the SEC and Cuomo are at each's throat means the truth may come out.

The Continuing SEC Circus

"In the headquarters of the [SEC], Mr. Madoff's name is rarely spoken. More than seven months after he was sentenced to prison for orchestrating a global Ponzi scheme, shaken SEC employees are still struggling to come to grips with how they failed to catch him before it was too late. ... It is the job of Robert S. Khuzami, the SEC head of enforcement, to unmask the next Madoff--and, equally daunting, to convince skeptics that the commission can reassert itself and adequately police Wall Street. ... Unlike some at the commission, Mr. Khuzami, 53, talks openly about the Madoff fiasco. 'For a group of people committed to investor protection and prevention, the tragedy of investors' losses are not lost on anyone,' he said in an interview in his bright, corner office in Washington. ... Wall Street vastly outdoes the SEC in terms of people, money and, many in the financial industry argue, talent. The administration has requested a budget of $1.3 billion for the SEC for 2011. ... On Monday, what SEC officials had hoped might be a quick victory in a prominent case instead turned into another potential headache. Mr. Khuzami and a squadron of SEC lawyers filed into a New York courtroom where the commission was trying to end its losing investigation into the takeover of Merrill Lynch by Bank of America [BofA]. But District Judge Jed S. Rakoff--who last September rejected as too low an earlier $33 million settlement that the SEC had reached with [BofA]--again raised questions about the commission's handling of the case. If he rules against the second settlement, for $150 million, the case is set to go to trial on March 1. ... The commission also has not sattisfied critics on Capitol Hill--and many ordinary Americans--who had hoped to see charges leveled at banking executives after the financial collapse. Mr. Khuzami recognizes that the cases the SEC brings, or does not bring, will define his tenure and, possibly, the future of the commission. 'It's all about the cases in the end,' he said. ... The SEC has hired some talent from Wall Street. Norm Champ, the former general counsel of Chilton Investment Company, a multibillion-dollar hedge fund, was named last year as an associate director in the examinations group in New York. Richard Bookstaber, a former Wall Street risk manager, joined the new division of risk, strategy and financial innovation", my emphasis, Jenny Anderson & Zachery Kouwe at the NYT, 9 February 2010, link:

http://www.nytimes.com/2010/02/09/business/09sec.html.

Just what we need, more "former" Wall Streeters at the SEC. Khuzami is right about one thing: we will be interested in the cases the SEC doesn't bring. Who at the SEC cares about "investor protection" as opposed to protecting their former and future employers?

Pravda on Vampire Squid

"I am a capitalist pig, and proud of it, thus you would not expect me to support government interference and more strenuous regulation of financial institutions--after all, capitalism (free markets) and tight regulation don't mix well. Well, at the risk of being kicked out of the Capitalist Pig Party, I am in support of tighter regulation of too-big-to-fail (TBTF) institutions--the likes of Citigroup, JPMorgan, Bank of America and (God forbid, after all, they are doing 'God's work' their CEO's words, not mine) Goldman Sachs. Lack of tight regulation in the TBTF space leads to the worst economic system of all: asymmetric socialism. The enormous gains are reaped by employees and shareholders, but losses are socialized and paid by taxpayers. That is simply immoral. Letting companies fail is at the core of capitalism's DNA, and I still stand by that", Vitaliy Katsenelson at Pravda, 30 January 2010, link:

http://english.pravda.ru/opinion/columnists/111922-capitalism-0.

More right-wing opinion from Pravda. Who would have believed this 20 years ago?

Ken Lewis-Scapegoat-2

"The bank bailouts of the last two years have been 'about as popular as a root canal,' as President Obama noted in his State of the Union address. ... So it was probably inevitable that New York Attorney General Andrew Cuomo would file civil fraud charges against Bank of America, its former CEO Ken Lewis, and its former CFO Joe Price, as he did this week. Everyone assumes Mr. Cuomo is running for governor this year, and BofA is conveniently based in Charlotte, not Wall Street. .... The Martin Act is a prosecutorial bludgeon that forces most defendants to settle out of court rather than risk being convicted merely for having been wrong on some facts. ... When Mr. Lewis told Treasury Secretary Hank Paulson and [Fed] Chairman Ben Bernanke that he was considering invoking this clause and scotching the deal, they insisted he buy the faltering trading house and later announced an additional taxpayer investment in BofA to allow the bank to digest Merrill. Mr. Lewis swallowed hard and went ahead with the merger. Mr. Cuomo says this was all a bluff by Mr. Lewis in order to trick the regulators into providing more TARP money. Never mind that Mr. Lewis had a contractual right to pull out of the deal if he felt material facts had changed. ... Mr. Cuomo's logic boils down to this: Mr. Lewis is guilty for not telling his shareholders about rising losses at Merrill, but he's also guilty for trying to protect his shareholders from the rising losses at Merrill. ... On the public evidence so far, Mr. Cuomo should be thanking Mr. Lewis, not suing him", my emphasis, WSJ Editorial, 6 February 2010, link:

http://online.wsj.com/article/SB10001424052748704533204575047421387157564.html.

I'm with the WSJ. Cuomo's case against the BofA and Lewis was announced the same day as the SEC's new BofA settlement. Are Cuomo and the SEC engaging Lewis in a tag-team wrestling match? Cuomo apparently wants to run for NY Governor over Lewis corpse. I hope Lewis and the BofA take this one to the mat. That BofA is not headquartered in NY may be the reason Cuomo is pursuing this case to the Vampire Squid's applause.

Real Estate Banking

"Bank of America Corp.'s [BofA] shotgun marriage to Merrill Lynch & Co. has produced plenty of ill will, and big profits in real-estate investment banking. ... The secret of success: [BofA] leveraged its relationships with real-estate borrowers to generate a flood of investment-banking work, much of it handled by former Merrill bankers who decided to stick around after the securities firm was acquired last year. ... Many expect a rash of initial public offerings by private companies comparable to the one that followed by commercial real-estate collapse of the early 1990s, with large payoffs for underwriters. ... [BofA] was a lead lender to REITS in 26 of the 39 stock offerings in which it was the left bookrunner, according to an analysis of data provided by Dealogic and SNL Financial. ... 'I have always taken the position that unless firms provide us with debt capital, we don't give them any business,' said Debra Cafaro, chief executive of Ventas Inc., a health-care related REIT that raised $312 million of equity in April with [BofA] as a lead bookrunner", Anton Troinovski at the WSJ, 13 January 2010, link:

http://online.wsj.com/article/SB10001424052748703672104574654802477763302.html.

All the more reason to separate investment and commercial banking. That Ventas can go to the same store for loans and equity is a problem for FDIC insured institutions. Bring back Glass-Steagall.

SEC Waivers

"Forget too big to fail. In the eyes of federal regulators, many Wall Street firms are too big to punish. ... Despite these findings, these financial giants got, sometimes repeatedly, special exemptions from the [SEC] that have saved them from a regulatory death penalty that could have decimated their lucrative mutual fund business. ... However, on Friday, the SEC said it has expanded its probe of Bank of America to include the bank's possible failure to disclose mounting losses at Merrill Lynch. ... While the companies were punished in other ways, they were spared from what some claimed would be 'severe and irreparable hardships.' In fact, the last time the SEC's staff could recall a waiver being turned down was 1978. The SEC, however, declined to comment in detail in its decisions. ... The Goverment Accountability Office, Congress' investigative arm, reported this year that SEC enforcement workers have felt overwhelmed by their caseloads and undermined by SEC leaders hesitant to levy heavy punishment. ... Securities experts think companies wouldn't apply for waivers if they didn't think their applications would be granted. At the same time, the fact that the SEC could someday deny one is a major weapon in its arsenal, experts said. ... In 2003, Citigroup settled a case after the SEC accused it of manipulating stock research. The settlement 'permanently restrained and enjoined' Citigroup from violating a specific section of federal securities laws. Then in 2006, Citigroup and other companies were cited for improperly marketing 'auction rate securities,' bonds issued by municipalities, student loan entities and corporations. The SEC censured Citigroup and fined it $1.5 million", Chris Adams at the Houston Chronicle, 14 December 2009, link: http://www.chron.com/disp/story.mpl/headline/biz/6768581.html.

$1.5 million for Citigroup and Craig Gile goes to prison, my 25 June 2008 post: http://skepticaltexascpa.blogspot.com/2008/06/citigroups-joe-jett.html. The SEC and SDNY US attorney's office are sick jokes. Some threat, that a waiver might be denied.

Banks Need Not Learn

"Banks have spent the past year dealing with a mountain of bad assets. Now attention is turning to trillions of dollars of debt they have maturing over the next few years. ... The situation was caused by banks engaging in cheap borrowing during the credit-market boom that began in the middle of the decade and lasted through 2007. As financial markets hit crisis mode, banks were propped up by government guarantees that enabled them to keep selling debt--but with much shorter maturities. ... The life span of bank debt has shrunk to historically low levels, forcing banks to deal with the problem sooner than later. Globally, the average maturity of new debt rated by Moody's fell from 7.2 years to 4.7 years in the past five years. ... The problem is especially acute for US and UK banks, which have been among the hardest hit by the financial crisis. ... Large banks such as Citigroup Inc. and Bank of America said they expect no problem refinancing at affordable rates and that they have historically high levels of cash to cover maturing debt. Their funding needs are likely to be lower anyway because of sluggish lending and sales of assets or business that require debt funding. ... The government debt also was sold at markedly cheaper costs. A Baa-rated bank that sold government-backed three-year debt would have paid a coupon of about 1.3%. That same bank would have to pay 7.75% to sell 10-year debt, according to Moody's. That is important because banks are being pressured to sell longer-term debt", Carrick Mollencamp & Serena Ng at the WSJ, 24 November 2009, link: http://online.wsj.com/article/SB10001424052748703819904574554223793153390.html.

Banks can get in trouble on both sides of their balance sheets. They should not run "unmatched" books. The regulators should prevent this. Zimbabwe Ben could easily be suppressing interest rates 6.45% (7.75% - 1.3%) to float the banks.

Yves Smith Smashes the Fed's Looking Glass

Zimbabwe Ben (ZB) wrote a Washington Post, 29 November 2009, opinion piece. I planned to write about it and repeat my call to repeal the Federal Reserve Act and liquidate the Fed, when I read Yves Smith's (YS) 29 November 2009 post at her Naked Capitalism, link: http://www.nakedcapitalism.com/2009/11/bernanke-tries-to-defend-the-fed.html. YS dissected ZB's Fed apologia, comprehending everything I intended to say. Thank you YS. ZB's appeal to "global consensus", is an "argument" that would not have swayed my fifth-grade class. We would have said, "Bandwagon Propaganda", no argument. The Fed supposedly has "teams of economists, financial market specialists and other experts". So? My fellow fifth-graders would have said, "Appeal to authority. No argument". ZB, give up. Do you believe we here in the real world think your stress tests were any more than a public relations exercise? ZB notes, "Our financial statements are public and audited by an outside accounting firm". So? Didn't Deloitte & Touche (D&T) audit Merrill Lynch? ZB, call me about that audit. I'll give you an estimate. I wonder if the PCAOB "inspected" D&T's Fed audit?

Junior at Junior Deputy Accountant, 28 November 2009, has some choice words for ZB, link: http://www.jrdeputyaccountant.com/2009/11/zimbabwe-ben-defending-fed.html.

Robert Higgs smacks ZB at Beacon, 28 November 2009, link: http://www.independent.org/blog/?p=4214. "Such a warning seizes the high ground by creating the presumption that Bernanke and the present Fed have proved themselves to be beneficial to the causes of financial reform and economic recovery. ... Independent? Of you and me, to be sure, but not of Goldman, BofA, JPMorgan Chase, and the other old boys up there in the big city".

SEC-DOJ Dilemma

"On Monday, US District Judge Jed. S. Rakoff told the [SEC] to be ready to begin the civil insider-trading trial in five months. ... Ordinarily, civil and criminal investigators coordinate their activities. In instances where both file charges, most judges allow the government to 'stay,' or postpone the SEC case until the criminal case is completed to avoid complicating the criminal matter, according to lawyers and people familiar with the situation. ... That is possible since the SEC wouldn't want to jeopardize the government's criminal case, lawyers say. The [DOJ's] US Attorney's office in Manhattan declined to comment, as did a lawyer for [Raj] Rajaratnam. ... 'Defendants in criminal cases don't have that ability. In a criminal case, the first time a defense lawyer may see critical witnesses is in the courtroom when they're testifying,' [Michael Schacter, Wilkie Farr & Gallagher lawyer said]. ... If the SEC withdraws its case, it could be another blow for the agency, which has drawn fire from its critics recently. ... The ruling puts the spotlight back on Judge Rakoff, whose harsh SEC rulings recently have been on display. In August, the judge critcized the SEC's $33 million settlement with [BofA] Corp. over disclosure of bonuses following the bank's purchase of Merrill Lynch last year. ... Judge Rakoff has long experience in insider-trading cases. As a defense lawyer before being nominated to the federal judiciary, Mr. Rakoff represented Martin Siegel, the Kidder, Peabody & Co. investment banker, who the US alleged passed inside information about takeover deals to Ivan Boesky in exchange for suitcases of cash in the 1980s. Mr Siegel pleaded guilty to securities fraud. ... An SEC trial in advance of a criminal trial would give defendants the opportunity to depose, or interview the government's witnesses in the case. The government doesn't want to have its witnesses on the record saying anything before its put them on the stand under oath. ... Judge Rakoff in 2005 refused to postpone an SEC civil suit against Anuradha Saad, chief executive of a cancer-information company, and other executives, who were also charged by federal prosecutors. ... In an opinion rejecting the postponement, Judge Rakoff noted that because the litigation was both a criminal and civil matter, the defendants were 'fully entitled to to the timely discovery that federal law grants them in defending such an action.' In the decision, he said 'parallel proceedings' of the US Atttorney and SEC had 'bizarre aspects' and that it is 'stranger still' that the two can combine their efforts in a case 'against some hapless defendant'," my emphasis, Susan Pulliam and Kara Scannell at the WSJ, 27 October 2009, link: http://online.wsj.com/article/SB125657477463408409.html.

More WSJ editorializing in a news article. What "harsh" rulings? I like Rakoff more every day. Preet Bharara (PB) why not let Rajaratnam depose "your" witnesses? Are you afraid they might be impeached with inconsistent statements? Or your coaching them to give perjured testimony might be exposed? Would you suborn perjury? Would you buy my bridge over the East River? It's only $1 billion. Well PB? Will anything like this happen to Lloyd Antoinette Blankfein? hah! This case looks like another DOJ waste of time.

Ken Lewis-Scapegoat

"Dogged by shareholder lawsuits and by multiple law-enforcement investigations into his bank's ill-fated merger with Merrill Lynch [ML], [BofA] CEO Ken Lewis announced on Sept. 30 that he would leave his post by the end of the year. ... At the root of Lewis's woes is a merger that more closely resembles a shotgun wedding. [BofA] negotiated a hasty takeover agreenment with [ML] over the course of a single September weekend following the shocking collapse of Lehman Brothers. Treasury Secretary Hank Paulson aggressively championed the deal as integral to his effort to stem the rising financial crisis. ... Merrill's staggering losses required [BofA] to accept a $20 billion infusion of additonal federal cash immediately following the merger., and [BofA] shares now trade at a fraction of their former value. ... The numerous civil complaints say that Lewis sold out their interests by saddling them with a disproportionate share of the cost of rescuing the world economy at the behest of bureaucrats in Washington. ... But the events surrounding the merger indicate that Paulson and Bernanke may have placed improper pressure on Lewis to disregard his duties to his shareholders. If that is true, then Lewis looks less like a criminal than like the hapless pawn of top government regulators determioned to stem the crisis at any cost. ... Lewis clarified that Paulson did not want the government to be required to disclose that it was committing additional TARP funds to bail out [BofA] until after the merger with Merrill had taken place. ... [BofA's] shareholders were surely shortchanged in the merger, but was Lewis criminally responsible, or was he punk'd by a duo of super-regulators determined to control the fate of [BofA] by installing a whole new management team, if necessary? The latter seems likely. ... In reality, a former Trasury secretary and a cerrent [Fed] chairman are unlikely to be indicted for cormers they cut in their efforts to stave off the collapse of the financial system. ... But letting Paulson and Bernanke off the hook will only redouble the determination of politicos and shareholders to exact punishment on the only remaining culprit. ... Courts have also recognized a second defense that might apply to Lewis: a defendant's reasonable belief that a government official had exempted his conduct from the law may negate the required mens rea, or ciminal intent, needed for convicton. ... To prosecute Lewis while giving Paulson and Bernanke a free pass would send an even worse signal: that the government will take care of its own, and that politicians will find their scapegoats among those who attempt to run productive enterprises rather than those who regulate them", Marie Gryphon at National Review, 7 October 2009, link: http://article.nationalreview.com/print/?q=ODdiMmNjNzJiYTQ2MmI3NjgyMjYxYTZkND1jNjVkMTQ=Q.

"The Treasury Department's pay czar pushed outgoing [BofA] Chief Executive Kenneth D. Lewis into giving back about $1 million he received so far this year and forgoing the rest of his $1.5 million salary for 2009, say people familar with the matter. ... Kenneth ... Feinberg pushed for the deal because he thought the package of retirement benefits and unvested stock Mr. Lewis takes with him when he steps down at year's end--currently worth at least $69.3 million, according to securities filings--was large enough and possibly too big. ... Thursday's decision caps a rocky relationship between Mr. Lewis and the US government", Deborah Solomon and Dan Fitzpatrick at the WSJ, 16 October 2009, link: http://online.wsj.com/article/SB125564137421788337.html.

This is the way it looks to me.

Is it a coincidence that Feinberg "sticks up" Lewis on the same day GSG announces $16.71 billion in bonuses? Is this a federal "head fake"? Lloyd Blankfein has 3,354,836 GSG shares worth $621 million at $184.96 each. Why doesn't Feinberg TELL Blankfein "You will donate the proceeds of the sale of these shares to the Treasury? Won't you"? See my 6 September 2009 post: http://skepticaltexascpa.blogspot.com/2009/09/goldman-speaks.html.

Ken Lewis Whistleblower?-3

"When [BofA] bought Merrill Lynch last winter, the political class applauded and called CEO Ken Lewis a solid citizen. Now, from the safety of noncrisis hindsight, our politicians claim that the bank's shareholders may have been mistreated. Few of those shareholders are complaining, given the profits Merrill has been generating for the bank in recent months, but the pols apparently want a scapegoat for bailouts and bonuses. Mr. Lewis fits the bill. ... Of course, proxies rarely make anything clear, because, like all SEC-mandated disclosures, they are created to ensure regulatory compliance rather than inform invstors. Was this one worse than average? ... Anyone who cared enough to read the proxy probably consumer enough financial news to understand that BofA was willing to pay to maintain Merrill's principal asset--its employees. ... But count us as skeptical that BofA managers would risk violating securities laws in order to make sure that other people could collect large bonuses, or to hide another firm's losses so they could have the privilege of overpaying to acquire it. ... If Mr. Cuomo wants to do a public service, he could focus on the government's own role in this episode. ... Here's a theory of the case that won't help Mr. Cuomo become governor, and won't help Mr. [Edolphus] Towns make headlines, but might even be true and fair: Amid the autumn and winter financial panic, everyone involved was operating under tremendous pressure with incomplete information. Federal officials all but ordered Mr. Lewis to buy Merrill and they certainly knew all about the bonuses", original italics, my emphasis, Editorial at the WSJ, 21 September 2009, link: http://online.wsj.com/article/SB10001424052970204518504574419050445773522.html.

"After fighting to keep his grip on the bank he helped build from a scrappy Southern outsider to the nation's largest in assets, [BofA] Chief Executive Kenneth D. Lewis said he will resign by year end. ... Even as the board backed Mr. Lewis publicly, there were signs that his interests and the bank's were diverging. Mr. Lewis has hired his own lawyers, former US Attorney Mary Jo White and James Wyatt III, a criminal-defense expert in Charlotte, while the board and the bank have separate representation on the various lawsuits and investigations relating to the bank's purchase of Merrill Lynch", Dan Fitzpatrick and Joann Lublin at the WSJ, 1 October 2009, link: http://online.wsj.com/article/SB125434715693053835.html.

It is inconceivable that Zimbabwe Ben and Hank Paulson didn't know.

Uh oh. Ken, watch your new lawyers like a hawk. You hired Mary Jo "Ping Pong Ball Fed" White. You don't know who your lawyers represent. My advice: get a Roy Cohn, if you can find one. One who would be unafraid to let the Fed, Treasury and DOJ know: If you come down, you will crash their whole corrupt system.

The SEC's Revolving Door at Work

"Two of the nation's most prominent law firms are facing scrutiny after a federal judge tossed a proposed government settlement with Bank of America Corp. [BofA] over bonuses paid to Merrill Lynch employees after their 2008 merger deal. ... While the judge's decision leaves [BofA] as a defendant facing a trial, he funneled some of his ire toward the lawyers involved. The SEC stated in court filings that lawyers 'made the relevant decisions concering the disclosure of the bonuses.' Judge Rakoff retorted: 'It that is the case, why are the pernalties not then sought from the lawyers?' Legal observers said there is a risk, though slight, that the firms could become defendants in the case or face a separate claim by the SEC that the lawyers violated professional ethics. ... The agency doesn't want to make lawyers fearful of giving advice. A spokesman for the SEC declined to comment. ... Another risk to Wachtell in any government action is that bank executives could choose to waive attorney-client privilege for their defense, potentially exposing Wachtell to further scrutiny and possible liability", my emphasis, Nathan Koppel, Ashby Jones and Amir Efrati at the WSJ, 16 September 2009, link: http://online.wsj.com/article/SB125305954790414019.html.

How smart need one be be to conclude the lawyers were hired to lend the BofA their privilege? Is the SEC concerned about making "lawyers fearful of giving advice", or keeping the revolving door open for SEC staffers to join NY BigLaws?

The SEC-BofA Circus

"Beware of regulators bearing the gift of quick settlements, especially amid a populist stampede. That seems to be the healthy attitude of Judge Jed Rakoff to the recent SEC fine against [BofA] for handing out unpopular bonuses. ... This tale begins in the panicked days of last year's financial crisis. ... Enter new SEC chief Mary Schapiro, who has used the episode to signal a new era of supposedly get-tough enforcement. The SEC brought a civil lawsuit, alleging that BofA had misled inveastors by failing to disclose the bonuses in the proxy documents it sent to shareholders. ... In pursuing BofA, Ms. Schapiro broke with the SEC's policy of pursuing individuals, rather than companies, in cases of alleged fraud against investors. ... Next enter Judge Rakoff, a Clinton appointee, who the SEC expected would rubber stamp the deal. But the judge has proven to be skeptical of the SEC's case. The judge first asked why behavior that the SEC considered so egregious merited a fine of merely $33 million. ... The SEC's defense is that it would be too difficult to go after BofA management, since individuals will claim their decisions were advised by corporate lawyers and are protected by attorney-client privilege. ... Then again, perhaps the real reason the SEC is reluctant to go after individuals is because, regarding the BofA, all roads lead back to the federal government. ... Buried within a brief filed recently to Judge Rakoff, the SEC included the bombshell detail that BofA had in fact supplied the Fed and Treasury with a financial document that included information about the bonuses. ... If the Fed and Treasury were fine with these payouts, and didn't demand their discliosure, pehaps Messers. Paulson and Bernanke should be the parties in the SEC dock", my emphasis, Editorial at the WSJ, 5 September 2009, link: http://online.wsj.com/article/SB10001424052970204731804574387044194076168.html.

"The letter on Tuesday from David A. Markowitz, the chief of Mr. Cuomo's Investor Protection Bureau, said that 'attorney-client privilege is hindering this office's ability to make fair and fully informed decisions as to what charges, if any, to bring and whether individual [BofA] officers should be charged.' in its response, [BofA] disputed that assertion on several fronts, writing that 'because [BofA] did not violate the law, it has not offered reliance on legal advice as a defense'," Zachery Kouwe at the NYT, 10 September 2009, link: http://www.nytimes.com/2009/09/10/business/10bank.html.

"A federal judge threw out the [SEC's] proposed settlement with [BofA] over its disclosure of controversial bonuses paid to Merrill Lynch [ML] employees, in an unusual ruling that casts doubt about how the agency handles probes of major US companies. ... The Rakoff ruling undermines one of the most high-profile cases against alleged corporate wrongdoing conducted under SEC chief Mary Schapiro, who took the job in January. It puts new pressure on the agency to show it is fighting for investors in the wake of the controversy over its policing of the financial industry during the Wall Street boom and its failure to catch Bernard Madoff's massive fraud despite several red flags. ... In a rare scuttling of an SEC settlement, Judge Rakoff said the $33 million fine levied on [BofA] 'does not comport with the most elementary notions of justice and morality' because the company's shareholders--the victims of the alleged misconduct--are the same people being asked to pay the fine. He set a trial date for Feb. 1. ... Securities lawyers said they couldn't recall such a high-profile case being forced into a trial after the government and a company agreed to a settlement. In his ruling, Judge Rakoff often wrote that if bank executives in fact relied on legal counsel in crafting the proxy language, 'why are the penalties not then sought from the lawyers?' ... SEC spokesman John Nester said Monday the settlement, ... 'properly balanced all of the relevant considerations.' ... Wachtell, Lipton, Rosen & Katz, which represented [BofA], declined to comment. A lawyer for Shearman & Sterling, which represented [ML], declined to comment", my emphasis, Kara Scannell, Liz Rappaport & Jess Bravin at the WSJ, 15 September 2009, link: http://online.wsj.com/article/SB125294493976909051.html.

"'If the Bank is innocent of lying to its shareholders, why is it prepared to pay $33 million of its shareholders' money as a penalty for lying to them?' On this point, we think the judge is soft-pedaling the coercive nature of regulatory prosecution. ... Given all the dirty laundry already aired about this deal, including claims that [Fed] Chairman Ben Benrnake and former Treasury Secretary Hank Paulson forced a reluctant BofA to conclude its Merrill purhase, it's not surprising if the BofA was willing to pay for it to go away", Editorial at the WSJ, 15 September 2009, link: http://online.wsj.com/article/SB10001424052970203917304574413242609077958.html.

"With one rebuke from a federal judge, the [SEC's] tool for regulating financial markets and protecting investors faces daunting questions. Legal experts said Monday's rejection by US District Judge Jed. S. Rakoff of the agency's proposed $33 million settlement with [BofA] Corp. could bring tougher scrutiny of other settlements over alleged wrongdoing. For decades, the SEC has resolved more than 90% of its investigations through settlements, lawyers estimate. Defendants neither admit nor deny wrongdoing, and judges sign off on the deal with little scrutiny. In the process, government officials get to send a message of deterrence without blowing their enforcement budget, which could happen if too many cases went to trial. ... Other legal scholars noted that the judge undercut the derterrence message the SEC intended to deliver, suggesting that the proposed penalty was too light", my emphasis, Kara Scannell at the WSJ, 16 September 2009, link: http://online.wsj.com/article/SB125305845632913893.html.

"New York's attorney general, Andrew Cuomo, ramping up his investigation of Merrill Lynch's purchase by [BofA], issued subpoenas to the five directors on the bank's audit committee at the time fo the deal, according to people familiar with the situation. ... In a comment Wednesday, Mr. Cuomo said he wonders broadly where the boards were in this financial crisis, and whether BofA directors 'protected the rights of shareholders, were they misled, or were they little more than rubber stamps for management's decision-making?' ... 'Subpoenas by an attorney general of outside directors [are] quite unusual' for any reason, said Charles Elsdon, head of the Weinberg Center for Corporate Governance at the University of Delaware's business school", Liz Rappaport, Dan Fitzpatrick and Joann Lublin at the WSJ, 17 September 2009, link: http://online.wsj.com/article/SB125312111880316599.html.

Get tough enforcement? Against whom? The Feds encouraged the BofA to violate securities law? Never. The SEC's case stinks.

Did the SEC violate New York Law?

I'm sure Nester is right. What were the "considerations"? A managing directorship at say GSG, four New York BigLaw partnerships, and what else Nester? Who says the SEC can't be bought? We remember Nester. He appears in my 23 October 2008 post: http://skepticaltexascpa.blogspot.com/2008/10/who-is-stephen-cutler-2.html.

Would the BofA pay $33 million to stay in Zimbabwe Ben's good graces? It's peanuts. Through interest rate suppression, the BofA gets much more than $33 million a year from the Fed.

The SEC's "biggest tool" is as threatening as Monty Python's "comfy chair" wielded by the Spanish Inquisition. Consent decrees are an SEC tool. To protect miscreants, not investors. For decades I have advocated the SEC be deprived of this tool. The message the SEC sends with these settlements is: it can be bought off. Cheaply with big jobs to SEC enforcement personnel.

Will Cuomo's inveastigation lead to ZB and Henry Paulson? If not, what's he doing? IS the FBI looking to "Spitzer" Cuomo? Stay tuned.

Who Does the SEC Protect?

"The [SEC] is in the hot seat again. ... With the SEC taking the heat, the other government agencies involved in the melee over the BofA-Merrill merger--the [Fed] and the Treasury--must be breathing a sigh of relief. For now, at least. ... According to the SEC, BofA executives told the agency that they supplied the Fed and Treasury with a financial document that included an expected incentive compensation payout of $3.37 billion to Merrill executives. This document was circulated at a meeting in December 2008 during which BofA exectives and federal officials met to discuss the unexpectedly large fourth-quarter losses at Merrill. ... This revelation, buried in the SEC legal brief, is the first mention that Treasury and the Fed were made aware of the Merrill bonuses before they approved federal assistance for BofA", my emphasis, Michael Corkery at the WSJ, 26 August 2009, link: http://blogs.wsj.com/deals/2009/08/25/bofa-to-sec-fed-and-treasury-knew-about-merrill-bonuses/

"Federal judge Jed. S. Rakoff fired a new shot in his challenge to a $33 million settlement by [BofA] over investor disclosures, saying the government's justification for letting individual executives off the hook is 'at war with common sense.' ... The SEC has said it couldn't investigate individual executives' culpability because they said they relied on lawyers' advice. Unless the executives waived their right to keep the advice private, the SEC said it would face 'substantial obstacles" to building a case. ... If that were the regulator's policy, 'it would seem that all a corporate officer who has produced a false proxy statement need offer by way of defense is that he or she relied on counsel.' He said if the company insists on attorney-client privilege, there is no way to test the assertion and determine whether executives or their lawyers were culpable", my emphasis, Jess Bravin at the WSJ, 26 August 2009, link: http://online.wsj.com/article/SB125123100930658077.html.

"A federal judge told the [SEC] on Tuesday to give a better explanation of why it had agreed to a settlement with [BofA] over bonus disclosures without pressing the bank's executives harder. ... Responding swiftly, the judge questioned why the SEC did not insist that [BofA] waive attorney-client privilege before striking a $33 million settlement. He also questioned whether bank executives--or the outside lawyers--should be charged in the case. ... 'It is extremely unsual for a judge to want to look under the bonnet,' said George B. Newhouse Jr., a former prosecutor and now a partner at Brown, White & Newhouse, a law firm in Los Angeles", Louise Story at the NYT, 26 August 2009, link: http://www.nytimes.com/2009/08/26/business/26bank.html.

The Fed and Treasury knew before the BofA-Merrill merger. Amazing.

If the SEC's legal staff is so weak, it is unaware of the "crime-fraud" exception to lawyer-client privilege and that the "advice of counsel" defense will not dismiss a criminal indictment, Mary Schapiro should fire her legal staff. Eric Holder, what say you? Isn't "advice of counsel" a defense an accused can raise to show he lacked mens rea? Since it is no element of a crime, it will not dismiss an indictment, correct? The SEC pursues civil actions and thinks the "advice of counsel" defense prohibits its investigating the BofA-Merrill deal. Who is the SEC kidding? Good show judge Rakoff. Keep these rulings coming.

It is unusual Newhouse. Unfortunately. Did the SEC protect some New York BigLaws in return for seven-figure jobs in 2-3 years for some SEC staff attorneys? Or to protect Zimbabwe Ben? Or Hank "fomerly of Goldman Sachs" Paulson? Stay tuned.

Goldman, the Vulture

"Wall Street banks and lawyers could collect nearly $1 billion in fees from the Federal Reserve Bank of New York and [AIG] to help manage and break apart the insurer, according to a Wall Street Journal analysis. ... The government has a plan to recoup the more than $100 billion in taxpayer money it put at risk in the rescue. The plan requires hiring firms to handle public offerings of some AIG units and outright sales of others, to manage some toxic AIG assets, and for other tasks. ... Goldman Sachs Group Inc., [GSG] Bank of America Corp. and JPMorgan Chase & Co., have all gotten assignments in recent months to help dismantle AIG. ... The situation puts the government in the potentially uncomfortable position of employing some of the same firms it regulates. In theory, actions the government takes in connection with those firms, for example, could affect how effective the firms are at handling their AIG assignments", my emphasis, Liam Pleven and Aaron Lucchetti at the WSJ, 6 August 2009, link: http://online.wsj.com/article/SB124951576916509361.html.

Can you believe this? After getting $13 billion from the AIG bailout, GSG found some "meat was left on the bones", and is picking at the carcass. Is there a less appropriate firm to work for AIG than GSG? Plan? Here's mine: let the "counterparties" return the $120 billion they got. I'm so generous, I'll even forgo any interest.

Danger, Uncle Sam at Work

"Bank of America Corp. [BofA] agreed to pay $33 million to settle a civil lawsuit alleging that it misled shareholders about billions of dollars in bonuses promised to Merrill Lynch & Co. employees when it bought the troubled firm at the height of the financial crisis last year. ... [BofA], the largest US bank in assets, neither admitted nor denied wrongdoing in settling the lawsuit, describing the agreement with the [SEC] as a 'constructive conclusion' to the matter. The case reflects the SEC's heightened effort to speed up cases, as new SEC Chairman Mary Schapiro and new enforcement director Robert Khuzami take a harder line with companies and individuals under investigation. ... The SEC said the documents show Merrill wouldn't pay year-end bonuses before the deal closed without [BofA's] consent. The bank's view is that the proxy didn't state Merrill bonuses would go unpaid and that it was well known that Merrill had been holding money for year-end awards, according to people familair with the bank's thinking on the matter. ... The US ultimately provided an additional $20 billion to push the deal forward, making [BofA] the second lagest recipient of bank bailout funds after Citigroup", my emphasis, Dan Fitzpatrick and Kara Scannell at the WSJ, 4 August 2009, link: http://online.wsj.com/article/SB124931920883302049.html.

I'm with the BofA on this. This is another empty SEC settlement. Uncle Sam gives the BofA $20 billion and the SEC gets $33 million, .165% back. Big deal. That Merrill held the bonus money was public knowledge. I see this settlement as Uncle Sam's continuing intimidation effort at BofA.

Zimbabwe Ben-Trotskyite

"Bank of America Corp. is operating under a secret regulatory sanction that requires it to overhaul its board and address perceived problems with risk and liquidity management, according to people familar with the situation. Rarely disclosed publicly, the so-called memorandum of understanding gives banks a chance to work out their problems without the glare of outside attention. Financial institutions that fail to address deficiencies can be slapped with harsher penalties that include a publicly announced cease and desist order. ... The MOU is the most serious procedural action taken against [BofA] by federal regulators since the financial crisis erupted. Citigroup has been operating since last year under a similar order with the Office of the Comptroller of the Currency, according to people familiar with the matter. ... These people say the pact with the FDIC, which relates to the company's plans to shed assets and improve its corporate governance, among other things, essentially reinforces a strategy already underway at the financial giant. ... In late January, the [Fed] and the [OCC] downgraded their overall ratings of the bank to 'fair' from 'satisfactory,' according to people familar with the matter", Dan Fitzpatrick at the WSJ, 16 July 2009, link: http://online.wsj.com/article/SB124771415436449393.html.

January, isn't that after the recent Henry Paulson-Zimbabwe Ben (ZB) Ken Lewis "armtwist"? What's going on here? This article was titled, "US Regulators to BofA: Obey or Else". ZB now reveals himself to be a Trotskyite, Leon said, "The old principle he who does not work shall not eat, has been replaced with a new one: who does not obey shall not eat". Does this apply to Goldman too? Perhaps the ZB-POTUS Obama combine is really Leninist, "The best way to destroy the capitalist system is to debauch the currency" and "The way to crush the bourgeoise is to grind them between the millstones of taxation and inflation". Thank you Lenin. What about proposal POTUS Obama's healthcare proposal? See also my 20 October 2008 post: http://skepticaltexascpa.blogspot.com/2008/10/agents-of-influence.html. Well Eric Holder, do you believe it inappropriate for a publicly-held company to fail to disclose a MOU? Will indictments follow? See also my 18 June 2008 post: http://skepticaltexascpa.blogspot.com/2008/06/occ-vs-sec.html.