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JUDICIAL AUDACITY THREATENS STATUS QUO

I don't know about you, but I've had it up to here with activist judges who think they can overturn decades of legal precedent and ignore well-established norms of legal behavior in the pursuit of vague ideals like "justice" and "morality."

The latest example comes from the U.S. District Court in Manhattan, a hotbed of judicial promiscuity, where last week Judge Jed S. Rakoff refused to go along with a perfectly good settlement that had been carefully worked out between Bank of America and the Securities and Exchange Commission.

It should be obvious that this is a flagrant case of judicial overreaching.

A trial? Does Rakoff expect the $750-an-hour lawyers at Cleary Gottlieb to go into court and try a case on behalf of the bank rather than simply string things along with endless motions and depositions until they wear down the other side?

And what does fairness - or as Rakoff defined it, "elementary notions of justice and morality" - have to do with securities law?

Just because Bank of America told its shareholders that, in connection with its purchase of the failing brokerage Merrill Lynch, no bonuses would be paid to Merrill directors without its written consent, that didn't really mean there would be no bonuses. After all, the proxy also had a passing reference to the possibility of an exception to this statement, which could be found in Section 5.2 of something called the Company Disclosure Schedule. All a diligent shareholder had to do was read Section 5.2 to learn that, in fact, Bank of America had already approved $5.8 billion worth of Merrill bonuses. Then again, getting hold of the aforementioned Disclosure Schedule would have been quite a challenge, because, according to common corporate practice, the schedule was never actually disclosed.

Unfortunately for Bank of America, this is one of those subtleties of securities law that even the securities lawyers at the SEC had trouble grasping, particularly after the Merrill bonuses became public and a political firestorm ensued. An investigation was launched, and the SEC decided to bring civil charges against the bank for knowingly misleading its shareholders.

Rather than fight the charges, the bank opted to settle, explaining to the judge that it just wasn't worth the legal expenses and all the attendant bad publicity to establish its innocence at trial. Rakoff would have none of it.

Rakoff also balked at imposing the agreed-on $33 million fine on Bank of America. As he explained it to incredulous lawyers from both the bank and the SEC, he just couldn't see the logic of imposing a fine that would effectively be paid by the very shareholders who had been lied to, even as those responsible for the lie got off scot-free. Instead, he embarked on a quixotic campaign to find out who exactly was responsible for the lie, only to meet resistance from both the bank and the SEC.

Despite decades on the bench, Rakoff's still naive enough to believe that the laws mean what they say, and that just because everyone does it, doesn't mean it's right. He cares about outcomes more than process.

Come to think of it, maybe Rakoff is exactly the kind of activist judge we need more of, not less.

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