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Might the Hunter Become the Hunted? Judge Jed Rakoff, Mary Schapiro, and Rule 14a-9

Posted by Larry Doyle on February 18th, 2010 8:51 AM |

Judge Jed Rakoff and SEC Head Mary Schapiro

Judge Jed Rakoff and SEC Head Mary Schapiro

SEC Chair Mary Schapiro is on the front page of almost every major financial periodical for her ongoing pursuit to fine Bank of America for impropriety in handling its merger with Merrill Lynch.

Recall that the SEC had initially fined Bank of America $33 million last fall for its improper disclosure of Merrill’s financial figures to BofA shareholders prior to the shareholder vote approving the merger of these two financial titans.

Enter Judge Jed Rakoff who threw out the $33 million fine, calling it a ‘contrivance.’

With the ball squarely back in the SEC’s court, Mary Schapiro has now fined Bank of America a tidy sum of $150 million, but still did not pinpoint any single individual at BofA as being culpable for the impropriety. (more…)

Judge Rakoff Throws Out BofA’s Hypocrisy

Posted by Larry Doyle on January 5th, 2010 8:40 AM |

Judge Jed Rakoff

Judge Jed Rakoff

The economic landscape of 2009 remains littered with amazing stories and tales yet to be told. Sense on Cents would hope that all these stories generate a full dose of truth, transparency, and integrity.

To eliminate the hypocrisy presented by the financial industry, America needs more arbiters like Judge Jed Rakoff. Let’s review recent developments in the merger of then failing Merrill Lynch with Bank of America.

Were the multiple billions in bonus payments accelerated to Merrill Lynch executives in late 2008 anything short of a total misappropriation of taxpayer funds at large and Bank of America shareholder funds specifically? Did BofA executives conveniently look the other way as Merrill “robbed the bank?” This point of debate is the central premise of the current court proceeding being heard by Judge Jed Rakoff.

BofA very conveniently did not include details of the Merrill bonus payments in pre-merger disclosure materials. What is BofA’s argument for that oversight? Yesterday, BofA attorneys made the case that its shareholders should have been aware of these bonus payments from media reports. Interesting. The media becomes the punching bag for not properly reporting, and now BofA attorneys use the media as a punching bag for reporting. Is this a joke or what?

How did Judge Jed Rakoff respond to such a ‘reach’ defense?   (more…)

What Did Bank of America Know and When Did They Know It?

Posted by Larry Doyle on October 13th, 2009 8:19 AM |

Are the powers that be at Bank of America wilting under political pressure to release the details of its merger with Merrill Lynch? In fact they are and in the process, the executives at Bank of America are agreeing to waive attorney-client privilege. What are the critical points which New York Attorney General Andrew Cuomo, the SEC, those in Congress, and especially Bank of America shareholders want to learn?

1. What did Bank of America know about the ongoing deteriorating financial position at Merrill Lynch?

2. What did Bank of America executives share with their board members about the billions in bonuses to be paid at Merrill?

3. Did Ken Lewis overplay his hand? Please reference my commentary from a few weeks ago, “Documents Indicate Ken Lewis Utilized the MAC To Shake Down Bernanke and Paulson.”

The Wall Street Journal summarizes these topics this morning in writing, BofA to Hand Over Documents Related To Its Merrill Deal:

Mr. Cuomo’s investigators, as well as Judge Rakoff, have said a fuller accounting of the events surrounding the deal is a prerequisite to any resolution of the probes. BofA is hoping releasing the privileged documents will satisfy those demands, according to people familiar with the matter.

BofA’s move will likely reveal exactly what advice was provided by outside firms, according to people familiar with the matter. Those firms include Wachtell, Lipton Rosen & Katz, which represented BofA during the Merrill transaction and is a long and trusted adviser to the bank, as well as Merrill’s counsel, Shearman & Sterling LLP.

It may also show conversations with ex-general counsels Timothy Mayopoulos and Brian Moynihan. Bank of America recently hired law firm Paul Weiss Rifkind Wharton & Garrison LLP to join Cleary Gottlieb Steen & Hamilton LLP in representing the bank in the various federal and state investigations surrounding the Merrill acquisition.

“This is going to get to the down-and-dirty question of what counsel did say and did not say, what counsel meant and did not mean,” said James Cox, a law professor at Duke University.


(Associated Press) In a photo from Sept. 2008, Merrill Lynch Chairman and CEO John Thain, left, and Bank of America Chairman and CEO Ken Lewis shake hands following a news conference.

Down and dirty? I love it. Get the extra large popcorn. This should be good.


Documents Indicate Ken Lewis Utilized the MAC to Shake Down Bernanke and Paulson

Posted by Larry Doyle on September 29th, 2009 2:33 PM |

10.01.09 UPDATE FROM LD: I wrote this commentary this past Tuesday afternoon. Mr. Lewis tendered his resignation last evening. In regard to my concluding remarks in this post, I only wish all my calls on the market were equally as prescient.


The intrigue embedded in the Bank of America takeover of Merrill Lynch is never ending. While the book and movie of this high stakes Wall Street thriller will be voluminous, the story most certainly has many chapters yet to be written. To this point, the following questions remain outstanding:

1. Why, at the time, did Bank of America pay such a premium for Merrill Lynch?

2. Did Bank of America know all the details surrounding the $3.5 billion in accelerated bonus payments made to Merrill employees in December 2008?

3. What did Merrill CEO John Thain share with Bank of America CEO Ken Lewis in regard to the growing losses at Merrill?

4. Did Ben Bernanke and Hank Paulson pressure Lewis to complete the merger against his will?

5. Did Ken Lewis consider invoking the MAC (material adverse condition) clause and negate the deal? Did Lewis consider invoking the MAC to negotiate a cheaper price?

6. Did Ken Lewis use the leverage embedded in the potential implementation of the MAC clause to generate significant government support?

Recall that a recent SEC fine of $33 million imposed by the SEC on Bank of America was thrown out by Judge Jed Rakoff as nothing more than a contrivance in which taxpayer funds were used to effectively repay other taxpayers, those being Bank of America shareholders.

Judge Rakoff will hear this case between the SEC and Bank of America in early February. Perhaps at that time answers to the questions asked above will be fully uncovered and released. Perhaps stories will leak beforehand to shed light on this drama. To that end, welcome to Sense on Cents.

I read a story to which I will link, but can not promise the link will not be broken at some future point. As such, I will provide a brief synopsis which provides riveting insights into Question 6. reports today How Bank of America Used Merrill’s Losses to Bully the Government. In this report, the reporter offers that Corporate Counsel magazine has pored over hundreds of documents, e-mails, and transcripts pertaining to the Bank of America merger with Merrill Lynch.

In regard to the use of the MAC clause or renegotiating the deal, very clearly lays out how events unfolded last December:

The record shows that Bank of America decided not to disclose to shareholders its consideration of a MAC before the Dec. 5 vote. It also apparently decided not to use the MAC as leverage against Merrill to lower its price before the vote, even though the bank had agreed to pay a premium — $29 per share for Merrill stock that was selling at $17. It might have, but didn’t, use the MAC to force Merrill to drop its multibillion-dollar bonus pool.

Instead, the bank waited until after the shareholders approved the merger — but before the deal closed on Jan. 1 — and used the MAC to muscle the federal government and U.S. taxpayers into ponying up more bailout funds. At the time, the bank did not disclose the role of federal regulators in not invoking the MAC, and in promising the bank another $20 billion of taxpayer money in 2009 to complete the deal. (The bank had already received $25 billion in bailout funds in 2008.)

Some observers and politicians have accused federal banking officials of forcing Bank of America CEO Kenneth Lewis into completing the merger. But the documents suggest it was Lewis doing the bullying, relying on a highly vulnerable marketplace to win his way.

Wow. Did Ken Lewis overplay his hand? In light of this information, is there any doubt that Lewis is a short timer?

We will learn more in the days and weeks ahead as this drama plays out. You can’t make this stuff up . . .

Thoughts, comments, questions always appreciated.


Related Sense on Cents Commentary:
Did Big Ben Bernanke and Heavy Hank Paulson Break the Law in Buying Ken Lewis’ Silence (April 28, 2009)
Rep Edolphus Towns on Bernanke’s Testimony: ‘Something Rotten in the Cotton’ (June 26, 2009)

Will BofA vs. the SEC Ultimately Be Uncle Sam vs. Aunt Samantha?

Posted by Larry Doyle on September 15th, 2009 12:44 PM |

Will the ruling highlighted in my initial post this morning, “Judge Jed Rakoff  Indicts the Wall Street-SEC Incest”, ultimately pit one arm of Uncle Sam against another, or to coin a phrase, pit Uncle Sam vs. Aunt Samantha? How so? Would Bank of America CEO Ken Lewis under oath put former Secretary of Treasury Hank Paulson and Fed Chair Ben Bernanke on the hot seat and implicate them as the driving forces behind the BofA takeover of Merrill?

If Lewis plays that card under oath, Judge Jed Rakoff may be put in a position to adjudicate on the culpability of Paulson and Bernanke in this financial fiasco vs. the judgment of the SEC in imposing the $33 million fine against BofA.

You know that every party involved in this mess, with the exception of BofA shareholders, is cringing at the prospect of this case going to trial.

Bloomberg aptly describes the precarious nature of the predicament facing these parties in writing, Bank of America Ruling Leaves SEC with Few Options:

Now the SEC is in a jam, said Peter Henning, a former SEC attorney who teaches law at Wayne State University in Detroit. Regulators could dismiss a case in which the bank is accused of breaking the law. They could try the case and risk that the bank has strong defenses. Or they could file a new lawsuit against individual executives or lawyers after saying earlier that they lacked sufficient evidence to do so.

“In a sense, the SEC has painted itself into a corner,” Henning said in an interview.

Human nature dictates that individuals backed into a corner will often resort to desperate measures. How desperate is the SEC to save face rather than upholding its mission to protect investors? Bloomberg offers more grist:

“The parties’ submissions, when carefully read, leave the distinct impression that the proposed consent judgment was a contrivance designed to provide the SEC with the façade of enforcement and the management of the bank with a quick resolution of an embarrassing inquiry,” Rakoff wrote.

Rakoff rejected the bank’s arguments yesterday, saying he still doesn’t know why executives or their lawyers weren’t sued. He said a trial in the case, which neither side wants, would start on Feb. 1.

“The judge’s not-so-implicit message is that he wants people named and he wants those people to pay the penalties,” Anthony Sabino, a business-law professor at St. John’s University in New York, said in an interview. “The bottom line is that there have been very pertinent and important questions asked and the answers have not been very forthcoming.”

Could this scenario play out that Mary Schapiro as Aunt Samantha is compelled to make a case which implicates Hank Paulson and Ben Bernanke as Uncle Sam for improperly compelling a bank executive, Ken Lewis, to violate shareholder rights?

The twists and turns on this stretch of our economic landscape are getting ever more interesting.


Related Sense on Cents Commentary:

Did Big Ben Bernanke and Heavy Hank Paulson Break the Law in Buying Ken Lewis’ Silence? (April 28, 2009)

Judge Jed Rakoff Indicts the Wall Street-SEC Incest

Posted by Larry Doyle on September 15th, 2009 9:24 AM |

Will the American public ever truly know what happened in December 2008 when Bank of America shareholders’ interests were neglected by BofA’s management in completing its takeover of Merrill Lynch? Capitalism took a back seat to the supposed needs of financial expediency as defined by then Treasury Secretary Hank Paulson and Fed Chair Ben Bernanke.

How could the SEC pretend to uphold its mission and protect the BofA shareholders’ interests which were clearly violated last December? The SEC imposed a $33 million fine against BofA in hopes that the courts and American public could once again be duped in the process. The $33 million fine is chicken feed for an institution such as BofA that had received $40 billion in taxpayer bailout money.

Against this backdrop, I wholeheartedly commend and endorse U.S. District Judge Jed Rakoff for throwing out this contrived agreement between the SEC and BofA. The Wall Street Journal provides further details this morning in writing, Judge Tosses Out Bonus Deal:

A federal judge threw out the Securities and Exchange Commission’s proposed settlement with Bank of America over its disclosure of controversial bonuses paid to Merrill Lynch employees, in an unusual ruling that casts doubts about how the agency handles probes of major U.S. companies.

The order, by U.S. District Judge Jed Rakoff, came as the New York State attorney general was weighing civil-fraud charges against Bank of America Corp. executives. Charges could be brought against the bank’s chief executive, Kenneth Lewis, and Chief Financial Officer Joseph Price, according to a person familiar with the investigation.

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 controversies 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 Bank of America “does not comport with the most elementary notions of justice and morality” (LD’s highlight) 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.

While Wall Street professionals, government regulators, and even media analysts would define this particular case as a ‘one off’ or ‘dealing with exceptional circumstances,’ I beg to differ. I strongly believe this case is a perfect example of the incestuous relationship between Wall Street and those charged with protecting investors, namely the SEC and FINRA. How often are investors’ interests neglected at the expense of the financial industry? More often than investors could possibly imagine.

The Wall Street Journal’s editorial, Rakoff Rakes the SEC, strikes a similar chord in writing:

The judge had other complaints, but broadly the deal “suggests a rather cynical relationship between the parties: the SEC 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 of this is done at the expense, not only of the shareholders, but also of the truth.” The parties will go to trial in February.

We look forward to it, especially in light of the recent news that Fed and Treasury knew all about these bonuses and stayed mum. Judge Rakoff has done a public service by exposing the political point-scoring that drives far too many regulatory actions. (LD’s highlight)

America needs more judges with the courage and integrity of Jed Rakoff. I salute him.


Rep. Edolphus Towns on Bernanke’s Testimony: “Something Rotten in the Cotton”

Posted by Larry Doyle on June 26th, 2009 11:05 AM |

Rep. Edolphus Towns

I commend Rep. Edolphus Towns (D-NY), Chairman of the House Committee on Oversight and Government Reform. Rep. Town’s closing statement at yesterday’s Congressional hearing culminated some riveting theatre. That said, this is not a one act play. Rep. Towns highlights the need to dig deeper in exposing what truly happened in the midst of the Bank of America takeover of Merrill Lynch. Towns finished the hearing with this Closing Statement:

At the outset of this hearing, I said that it’s time to shine some light on the events surrounding Bank of America’s acquisition of Merrill Lynch.

At this point, I would say we’ve gotten a peek, but we don’t have full sunshine yet.

I would make three observations:

1. There are significant inconsistencies between what we have been told today, what we were told two weeks ago by Ken Lewis, and what the Fed’s internal emails seem to say.

2. It is still unclear whether Bank of America was forced by the Federal government to go through with the Merrill deal, or whether Ken Lewis pulled off what may have been the greatest financial shakedown of all time; and

3. As a result of this hearing, we have learned that the SEC and FDIC played a role in this transaction.

Former Treasury Secretary Hank Paulson has agreed to appear before this Committee in July and I look forward to that hearing.

But we also need to hear from the FDIC and the SEC, so that we can better understand what happened during the dark days of last December.

Will Congress and the Obama administration look to pursue these ‘inconsistencies?’ Will the parties to these conversations collectively be brought together so these inconsistencies can be addressed? Will the American public once again be subjected to an accusation by one party to a conversation claiming the other party misremembered?

In true Joe Friday fashion, Rep. Ed Towns echoes my sentiments:

The immediate reaction to Bernanke’s testimony is less than positive. The Bank of America-Merrill Lynch ‘play’ could very well be a preview to the Fed as the uber-regulator for systemic risk. Sense on Cents strongly believes the Fed should not occupy that role. Why? Throw any concept of an independent Federal Reserve right out the window. Bloomberg addresses this prospect in, Bernanke Grilling May Weaken Case for Expanded Powers:

Bernanke failed to resolve some lawmakers’ questions on whether the Fed bullied executives and stepped over other regulators in the name of financial stability in a three-hour congressional hearing yesterday.

Criticisms by members of both parties are likely to diminish support for the Obama administration’s plan to make the Fed the single agency responsible for the largest and most interconnected financial institutions.

“There’s something rotten in the cotton here — no ifs, ands or buts about it,” Representative Edolphus Towns, a New York Democrat who chairs the House Oversight Committee, told reporters after the hearing. “There was a forced situation, a shotgun wedding” and “we’re just trying to find out who had the shotgun.”

Will it be business as usual in Washington or will the American public truly learn if Ben Bernanke and possibly Hank Paulson abused their powers.

Don’t recall? Misremembered? Just the facts, please!


Is Ben Bernanke a Well-Intended Crook?

Posted by Larry Doyle on June 25th, 2009 9:12 AM |

Do the ends ever justify the means? Does being well-intended preclude one from committing a criminal act? If our legislative bodies do not possess the heart and courage to ask these difficult questions, can we assume they are implicitly approving them? Oh, what a tangled web trillions of dollars in financial losses will weave.

The intrigue behind the acquisition of Merrill Lynch by Bank of America may never be known. Will Congress pursue total transparency and integrity to compel all pertinent parties to be fully forthcoming? Would Congress go so far as to appoint an independent investigator with powers to subpoena Ben Bernanke, Ken Lewis, John Thain, Hank Paulson, Larry Summers, and Tim Geithner? Does the rule of law apply in our country only when convenient? Bloomberg provides a peek into this intrigue, Republicans Say Fed Set Late Report of Merrill Loss:

House Republican staffers said the Federal Reserve tried to control the timing of disclosures of rising losses at Merrill Lynch & Co. in the weeks leading up to its takeover by Bank of America Corp., according to a memo obtained by Bloomberg.

The memo, prepared by staffers for Republican lawmakers at a House Oversight Committee hearing tomorrow, cites what it identifies as excerpts from internal Fed e-mails to support the conclusion. Fed Chairman Ben S. Bernanke is scheduled to testify at tomorrow’s hearing in Washington.

The e-mails show that the Fed “engaged in a cover-up and deliberately hid concerns and pertinent details regarding the merger from other Federal Regulatory agencies,” Representative Darrell Issa, the panel’s senior Republican, said in an e-mailed statement.

Strong words by Representative Issa.

Cover-up? Who was negatively impacted by not revealing information on losses at Merrill Lynch? Existing Bank of America shareholders, who may very well have voted against this deal.

Hiding details from other Federal regulatory agencies? Such as? The SEC. The OCC. The FDIC, which would assume a significant percentage of losses on assets purchased by Bank of America. How did FDIC chair, Sheila Bair, feel about that prospect?

“Dear Ben, Strong discomfort with this deal at the FDIC, for all the reasons you and I have discussed,” Bair said in a Jan. 14 e-mail, according to the memo. “My board does not want to do this and I don’t think I can convince them to take losses beyond the proportion of assets coming out of the depository institutions.”

Who else was clearly reluctant to finalize this transaction? Bank of America chairman and CEO, Ken Lewis. He testified in February to New York State authorities about being pressured by Bernanke and Paulson. Lewis hedged his statement about Bernanke’s and Paulson’s pressuring him, if not outright threatening him, under questioning by Congress earlier this month.

Will we learn more today from Bernanke or will this chapter close without a full accounting of what truly happened? Will Congress pass the Obama administration’s proposal to make the Federal Reserve the uber-regulator to stem systemic risk? Might shareholder rights be trampled in the process? Do the ends justify the means? Do laws mean anything? Can one be a well-intended crook? So many questions.


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