BofA Decision is Good News for Stocks
When a federal judge recently threw out a proposed settlement between the Securities and Exchange Commission and Bank of America, he struck a blow for shareholders that could make the current stock market rally stick.
The SEC had sued Bank of America for failing to tell shareholders, before they voted on the Merrill Lynch merger, that it had agreed to pay billions in bonuses to Merrill executives. But the regulators and the bank had agreed to settle the case for $33 million without ever telling shareholders who was at fault for keeping this important information secret. The SEC said in court filings that it wanted to leave it at that because it was not clear who was culpable. Demanding specific information about liability might require a time-consuming legal battle, the agency said in court filings.
U.S. District Court Judge Jed Rakoff said that wasn't good enough. In his ruling yesterday, he said the settlement connoted a "cynical relationship between the parties" that violated both the rights of shareholders and the truth. Ironically, the SEC is charged with maintaining orderly financial markets. By ruling against the SEC's settlement, Rakoff helped dramatically in that pursuit.
Why? We shareholders invest in the stock market for one reason: trust. We trust that managers will take our money and use it to help their companies grow and prosper. And we trust that as those companies grow and prosper, our investment will increase in value with the value of the company. We trust that executives will be honest. We trust that they will give us key information that will help us determine whether investing in their companies is wise or foolish. We trust they won't pilfer our assets--our retirement money. If they do, we trust that the company's board of directors and/or federal regulators will be watching and will punish them for it so that it won't happen again.
Because we have this trust, we require nothing from our stock market investments except that they provide a vehicle to share in future corporate profits. We don't require contracts. We don't require interest, as bond holders do. But we do require that if someone violates our trust that there be consequences.
Without Judge Rakoff, there were no consequences. The $33 million settlement that the SEC had approved was going to come out of corporate assets--in other words, out of the pockets of shareholders--rather than from the executives who had made the decision. No one would be fired. No one would face personal legal or financial liability.
It was a supreme violation of shareholder trust and it came hard on the heels of a decade that has been devastating to shareholder faith. We have suffered through 10 years of market stagnation that paid off only for corporate managers, who rejiggered their "pay for performance" programs to provide vast bonuses even when the company lost money, lost market share, lost stock value and jettisoned employees. We watched as Wall Street analysts touted stocks in public while they sold those same shares in private. We've watched as Main Street managers were forced to restate earnings because their companies were cheating--holding assets off balance sheet; understating losses; and pilfering shares at bargain prices under the cloak of secrecy.
The stock market could ill afford another breach of trust--another affirmation that neither Wall Street nor Main Streeet was looking out for the interests of company owners. That's you and I who buy company shares through our 401(k) plans and IRAs.
Judge Rakoff put managers on notice. There are consequences for misleading shareholders. In so doing, he provided a glimmer of hope that it's still safe to invest your retirement money in corporate stocks.