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Judge Approves Bank of America—Merrill Settlement

By Jeffrey B. Tracy, Litigation News Associate Editor – April 19, 2010

In what is being viewed as an order redefining the judiciary’s oversight role in approving settlements, U.S. District Court Judge Jed S. Rakoff, for the Southern District of New York, has approved a proposed $150 million securities fraud settlement, after earlier refusing to approve the parties’ $33 million settlement proposal.

Allegations and Initial Settlement Proposal
The Securities and Exchange Commission (SEC) had filed a complaint in August 2009, against Bank of America (BOA), alleging that the company lied to its shareholders regarding bonuses given to Merrill Lynch executives prior to the merger of the two companies at the apex of the financial crisis.

Prior to a shareholder vote to approve the takeover, BOA executives claimed that Merrill Lynch had agreed not to pay any bonuses until after the merger. Evidence uncovered later, however, showed that Merrill Lynch had already paid out $5.8 billion in bonuses prior to the vote. The parties reached an agreement and presented a proposed consent judgment to the court for approval.

As previously reported in Litigation News, the court refused to approve that proposed settlement of $33 million, and ordered the SEC to provide an explanation as to why it agreed to a settlement without challenging BOA executives’ contention that their attorneys had advised them not to disclose the payment of the bonuses to shareholders. The court required a further explanation as to who should be accountable for the bonus disclosures decision.

Denying the parties’ proposed consent judgment, the court issued an order [PDF] calling the parties’ arguments “absurd” and “hollow.” The court said it found the proposed judgment to be unfair, unreasonable, and inadequate.

Approval of the $150 Million Settlement Proposal
After hearing additional evidence, in late February, the court entered an order approving the parties’ revised settlement for $150 million but still called the parties’ proposal “half-baked justice” and “far from ideal.” In approving the settlement, Judge Rakoff noted that if the court were deciding whether the proposed settlement was fair, reasonable, adequate, and in the public interest, “the court would reject the settlement as inadequate and misguided.”

Despite his obvious displeasure with the proposal, Judge Rakoff cited two reasons for approving the settlement. First, he noted that “the law requires the court to give substantial deference to the SEC as a regulatory body having primary responsibility for policing the securities market, especially with respect to matters of transparency.” As such, Judge Rakoff found that “the court would fail in its duty if it did not give considerable weight to the SEC’s position.”

Second, Judge Rakoff cited the court’s own obligation to exercise restraint, noting that while the court “does not abdicate its role of seeking to plumb the depths of any proposal presented for its approval,” that role “should never be confused with any power to impose its own preferences.”

Impact on Litigators
Judge Rakoff's reluctance to approve the parties’ settlement highlights the role courts are taking in approving settlements that involve the public interest.

Courts’ closer examinations of settlements is an outgrowth of the Private Securities Litigation Reform Act of 1995 (PSLA), opines Howard S. Suskin, Chicago, cochair of the Class Actions and Derivative Suits Subcommittee of the ABA Section of Litigation’s Securities Litigation Committee .

“As a result of the PSLA, the securities field became much more accustomed to judges having an active supervisory role in securities litigation as they had an affirmative responsibility to determine what was in the classes’ best interest,” says Suskin.

“We are seeing the same trend emerging in approving settlements involving the SEC,” says Suskin.

“As to whether this trend continues will largely swing on the public’s perception of whether matters are being settled fairly,” he predicts.

This new trend of greater judicial oversight could impact private litigation and could have settlement implications as judges could require private litigants to conduct additional discovery at additional costs, says Carla R. Walworth, New York, cochair of the Class Actions and Derivative Suits Subcommittee of the Section’s Securities Litigation Committee.

“Parties to settlements subject to court approval have always had to jointly persuade the court that settlement makes sense and give the court a peek at the merits,” says Walworth.

“With governmental parties, judges in the past may have given more oversight, given the lack of resources and budget for many governmental agencies,” she notes.

“If greater judicial oversight and, in particular, more discovery is necessary to approve settlements in private litigation, the parties will incur greater expense and it may undermine the value of attempting to settle a claim early without the expense of extensive discovery,” says Walworth.

“If judges begin to have a greater oversight role in private litigation, a litigator could be put in a hard position having to explain to his or her client why additional discovery costs are needed just to get the case resolved,” Walworth says.

Keywords: litigation, securities, SEC, executive pay, consent judgment,


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