SEC may wield stronger hand after BofA bonus case

By Jonathan Stempel and Rachelle Younglai - Analysis

NEW YORK/WASHINGTON (Reuters) - U.S. securities regulators may emerge with greater power to extract settlements with real teeth in corporate enforcement cases, even after a federal judge has blocked its high-profile settlement with Bank of America Corp.

U.S. District Judge Jed Rakoff has twice refused to approve the Securities and Exchange Commission's $33 million settlement over the bank's failure to better disclose bonuses it had authorized Merrill Lynch & Co, which it was acquiring, to pay.

Rakoff has faulted the SEC for appearing to let the bank off too easily, and dismissed as nonsensical why the bank would agree to pay anything without admitting it had done anything wrong.

Governance experts said the case will strengthen the SEC's hand in future settlements, as the agency tightens oversight and tries to rebuild a reputation for aggressiveness after a slow year for enforcement. It may also prompt more transparency by companies, even without formal acknowledgment of wrongdoing.

"It is absolutely appropriate for a judge to question the amount and the context of a settlement," said Hillary Sale, a professor at the Washington University in St. Louis School of Law. "In theory this increases the SEC's negotiating power. The SEC can say, we can't settle because the courts won't let us."

In the Bank of America case, executives said they relied on lawyers' judgments as to what bonus details should be revealed. Yet the bank did not waive attorney-client privilege, meaning the names of the decision makers remained secret. An exasperated Judge Rakoff questioned why the SEC would agree to this.

"If the company does not waive the privilege," the Manhattan judge wrote, "the culpability of both the corporate officer and the company counsel will remain beyond scrutiny. This seems so at war with common sense."

"IT'S A CONFESSION"

In 2006 guidelines for assessing corporate penalties, the SEC said it would focus mainly on the degrees to which companies benefited from their wrongdoing, and to which penalties could help or further harm injured shareholders.

It also, however, said it would consider several other factors. Among them: the intent of the perpetrators, and whether complicity in the supposed violations was widespread.

"The SEC decided that in the case of disclosure violations, penalties should be substantially allocated to the responsible officers who caused the disclosure violations," said John Coffee, a law professor at Columbia University in New York.

"Otherwise," he said, "you are doing something that is perverse -- shareholders have gotten inadequate disclosure, and as a result you put a penalty on the corporation that falls on shareholders. So they are being punished twice."

Permitting companies to remain opaque on disclosure also does a disservice to achieving justice, according to James Cox, a law professor at Duke University in Durham, North Carolina.

"This robs the settlement of its social message and erodes the enforcement efforts themselves," he said. "Settlements have too frequently become means of closing files rather than serving the ends of justice or policies behind securities laws. Public policy is sacrificed for expediency."

Bank of America has maintained that its disclosures on Merrill bonuses did not mislead investors. A spokesman, Larry Di Rita, said the bank showed shareholders "the strategic logic of the Bank of America and Merrill Lynch combination, and we believe that is what shareholders were voting for."