11/24/2009 05:12 am ET Updated May 25, 2011

Merrill-BofA: Judge Jed Rakoff Exposes the Failures of the SEC

Before the Bank of America/Merrill Lynch merger, shareholders were told that no large bonuses would be paid to Merrill executives prior to the closing of their merger without Bank of America's consent. However there was a side agreement allowing Merrill Lynch $5.8 billion for bonuses. Because of this the SEC fined Bank of America/Merrill Lynch $33 million for its "misleading statement to shareholders." This was not a "misleading statement." It was a bold-faced lie. It was a non-disclosure intended to help gain shareholder approval for the merger. The SEC's "enforcement" is laughable. The $33 million fine they imposed is peanuts compared to the $5.8 billion in bonuses, especially since the SEC allowed the Bank of America to use the conventional wording of "not admitting any liability."

Who wouldn't lie if the price of being caught is only one-half of 1 percent of what you would gain? This thought crossed the mind of Judge Jed Rakoff, who called the agreement "cynical" and asked the SEC to review the fine and to fine individuals responsible for this "misleading." Instead of correcting its error, the SEC responded by defending its fine system. Has the SEC learned nothing from its responsibility in the Madoff scandal? Do they not grasp that fines should actually hurt and be proportionate to the amount of the "misleading statement?" Maybe they missed the financial crisis after all!

This is particularly disappointing from the new head of the SEC, Mary Schapiro, who had direct responsibility for the supervision of Madoff as head of the NASD (now called FINRA). It is also troubling that this is happening under the watch of the new Head of Enforcement, Robert Kuzami.

Nothing has really changed at the SEC. The comment of Judge Rakoff's states what we all know: "it is a contrivance designed to provide the SEC with a façade of enforcement." The real debate should focus on the 2006 SEC rule that states that it will extract "penalties from culpable individual offenders acting as a corporation." The SEC's response would be laughable if it were not dramatic. They allowed Bank of America to blame the lawyers who advised that they did not need to include the disclosure. Hello? Shall we now declare executives irresponsible of the actions of their lawyers?

If this rule were enforced, executives of Bank of America and/or Merrill Lynch would be fined for deciding not to make that "non-insignificant" disclosure.Shouldn't the SEC apply its own rules? Asking the question is answering it.

After it failed to supervise adequately the investment banks and failed to investigate the largest scandal of our history, if the SEC wants to rebuild its credibility, it will need to act decisively, and not hide beyond legal jargon or old habits. Its credibility has been sufficiently eroded and the US financial world needs a strong SEC if we want to restore shareholders confidence.

Remember the shareholder? Nobody at the SEC even thought about the damage they suffered in this case. But who cares about shareholders these days? Thankfully Judge Rakoff did not forget them.

The SEC simply doesn't get it. This is a new world of accountability and responsibility. Not a boudoir for lawyers arguing about pennies. If it wants to be relevant, the SEC needs to wake up!