US judge takes unusual step refusing to settle SEC-BofA case

Jed Rakoff, a federal judge at the U.S. District Court in Manhattan, said that the $33 million settlement between a top U.S. regulator and Bank of America Corp over executive bonuses could be unfair to the public. According to the lawyers that was an unusual step. At the focus of the case is SEC’s allegation that the bank made false and misleading statements to shareholders about bonuses promised to Merrill employees. Thus, the two parties will attend an August 10 hearing to answer the judge's questions.

"It certainly is a rare instance when a federal judge refuses to approve a settlement in a case, particularly at its initial filing," said Jacob Frenkel, a former SEC enforcement lawyer and now a partner at Shulman, Rogers, Gandal, Pordy & Ecker PA in Rockville, Maryland.

Rakoff is going to focus on whether the fine is in the public's interest, particularly given that Bank of America has taken $45 billion of taxpayer funds from the federal Troubled Asset Relief Program.

"This fine is small in comparison to even the bonuses that Bank of America is probably still paying," said James Cox, a securities law professor at Duke University. "We ought to be looking at the individuals who were the players here."

"Despite the public importance of this case, the proposed consent judgment would leave uncertain the truth of the very serious allegations made in the complaint," Rakoff wrote in his two-page order.

"The proposed consent judgment in no way specifies the basis for the $33 million figure or whether any of this money is derived directly or indirectly from the $20 billion in public funds previously advanced to Bank of America as part of its 'bailout,'" the judge added.

Duke University's Cox expects the Bank of America settlement to win approval. "The public interest is not likely to be found jeopardized or harmed by the fine that's going to be imposed," he said.