U.S. District Court Judge Jed Rakoff has rejected in the strongest possible terms a proposed settlement between the Securities and Exchange Commission (SEC) and the Bank of America over BofA’s alleged failure to disclose $3.6 billion of bonuses paid to Merrill Lynch employees shortly before BofA acquired Merrill. The settlement amounted to a $33 million fine to be paid by BofA.
Judge Rakoff’s decision to throw out the settlement agreement was based on an elementary sense of fairness. In his view, shareholders, having been obliged to pay the Merrill bonuses, were now being asked to pay the fine as well. Judge Rakoff quite properly interpreted the settlement as a evidence of a “cynical” relationship between the Commission and BofA management, whereby the Commission would claim a much-needed enforcement trophy, BofA would avoid further investigation, and the check would be picked up by the shareholders.
Judge Rakoff’s opinion points up the problem that few others in this age of good corporate governance tackle: namely that the cost of many feel-good reforms is inevitably borne by the shareholders for whom so many corporate governance experts and regulators cry crocodile tears.
Perhaps we can begin now to think about corporate governance reform as something other than a free good and evaluate proposals in that light. After that, maybe we can advance to another related matter: that people, not corporations, pay taxes and that efforts to stick it to corporations inevitably result in the costs being borne by individuals.