Essay On Sec Vs. Bank Of America


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SEC V. BANK OF AMERICA


The Case between SEC v. Bank of America rose out of the allegation made by the SEC against Bank of America in regards to the acquisition of Merill Lynch & Co. The SEC alleged that the Bank of America had illegally filed proxy statements that were misleading. The complaint argued that notwithstanding, the proxy statement that was filed had the implication that Merill was prohibited from paying bonuses under the terms of the merger agreement, however, a day before the merger closed, Merill paid about $3.6 billion in bonuses. The SEC realized the abnormality and filed for a complaint, that same day the Bank of America filed a proposed final consent judgment without either admitting or even denying the allegations. They agreed to be enjoined from making any false statements in proxy statement and they also agreed to pay a fine of $33 million.

It is imperative to understand that the complaint was filed about seven months after a class action complaint against Bank of America in connection with the merger. Rather than endorsing the proposal simply, Judge Rakoff decided to rule on whether it was fair and reasonable. He then further directed the parties to file written submissions in support. However, the court found that the submissions were inadequate and consequently, it went on to highlight some of the main concerns.

The first issues was if the shareholders were indeed the alleged principal victims, why did the SEC seek penalty from the corporation. This was a violation of its official policy to seek penealties from the culpable individuals that were acting for the corporation The second issue was the reason as to why the SEC accepted the offer which it characterizes as the individual’s advice of counsel defense in the absence of waiving the attorney-client privilege. Lastly, the judge raised a question stating that if such a waiver did exist, why then did the SEC not pursue an inquiry into whether the lawyers were in any way legally responsible.

The board of Directors of both Merill Lynch and Bank of America approved the merger. They had deliberated on the merger and they finally agreed that indeed it was the right thing to do for both companies. I do not believe that either board of the two companies breached their fiduciary duty to the shareholders when they agreed to the merger. It is important to understand that one of the main responsibilities of the board of governors in a company is the maintenance of financial accountability of the organization.

The board members can be said to act as the trustees of the organization assets and in most cases they must ensure that they exercise due diligence in order to see that indeed the organization is well managed and that its financial situation remains sound. The fiduciary duty requires the board members to stay objective, honest, trustworthy as well as efficient. Board members, are stewards of public trust and must always act for the good of the organization that they represent.

The duty of Care often requires the directors to make a business decision that is based on all available material information and they must act in a deliberate as well as informed manner. First, the board must act in good faith for the interest of the company. Second, the board of directors must believe that indeed their actions promote the best interest of the company based on the proper investigation of the options that are available.

Therefore, the two company’s board of governors understood their roles. The merger was in the interest of both companies and consequently the Board of Governors understood that they could find a larger market and expand their financial assets. On the other hand, Merill understood that indeed the merger would help them in order to grow and come under the financial wing of a giant such as Bank of America. As a result, it can be said that indeed the board of governors of both companies never betrayed the fiduciary duty that they had with the companies but rather they were acting in the best interest of their individual companies.

In fact, according to the business judgment rule, which is applied to courts, it decides whether the board has properly discharged its duties. The business judgment rule says that if directors acted in good faith like a reasonable person would have acted, then they are not in any way held liable for the unfavorable outcomes. Accordingly, the shareholders cannot hold the board in any case liable for negative consequences of a bad decision that was reasonably made. Therefore, with this in mind, it can be indeed seen that the board of directors never went against the fiduciary duties of their organizations as they tried their best when it came to merger as this was the most reasonable thing to do.

The government was right to be involved in the case; this was because there were several irregularities regarding the merger. In order to understand this there is a need to understand the SEC and it’s roles as well as responsibilities. The SEC is a Securities and Exchange Commission that was created by the congress and its main goal is to regulate the securities markets and protect investors from extortion and from investing in failing securities.

The SEC also monitors the corporation take overs that happen in the United States. The SEC further administers rules and regulations that are designed to ensure that full public disclosure is promoted and thus protection of the investing public against fraud related behaviors and manipulative practices is enhanced. The Securities and Exchange Commission is the organization that has the final say on matters that relate to the financial reporting by public corporations.

However determination of the best accounting standards is delegated to the profession of accounting. All publicly owned companies are required to be following the GAAPs and as these standards keep being developed and refined, accountants are required to be interpreting these standards and ensure the accounting practices and policies are adapted to the new standards. Publicly traded companies are required to give their financial statements to the SEC yearly and these statements are audited by certified public accountants, this is because they are not part of the company that is being audited and thus do not have a financial interest in the company, therefore known as independent parties.

The financial statements as well as the auditor’s report should be made available to the public, as well as existing and potential stockholders. The environments in which the accounting principles operate is changing constantly. Furthermore the economy, technology, and laws change. Generally Accepted Accounting Principles thus need to be constantly changed and refined too so as to ensure accountants respond to the changing environment. The Bank of America failed when it created proxy statements that were intended to mislead the public. The Proxy statement’s implication that Merill was not supposed to pay bonuses under the terms of the merger. However, Merill paid around $3.6 billion in bonuses. Therefore, due to these shady deals the SEC was right in ensuring that it came in to investigate the situation.

However, the problem came with the behavior of the government through the SEC to try and encourage the merger. This can be seen that joint final consent was made by Bank of America without them denying or even accepting the allegations that had been given to them. Further, the government had further tried to make sure that the merger did work when the SEC contended that indeed the Bank of America had not waived the attorney-client privilege and that they had accepted at face value assertios of the key executes that they delegated the relevant disclosure. Further, the Bank of America on the other hand asserted that it had not relied on the advice of the counsel and it never invoked the privilege, indeed the bank maintained that there was nothing false or even misleading about their proxy statement.

References


Harms, D. B., Rosen, E. J., & Practising Law Institute. (2002). The impact of Enron: Regulatory, ethical, and practice issues for counsel to issuers, underwriters, and financial intermediaries. New York: Practising Law Institute.
Grabar, N., Tafara, E., & Practising Law Institute. (2010). Global capital markets & the U.S. securities laws, 2010: Strategies for the changing regulatory environment. New York, NY: Practising Law Institute.
Lessambo, F. I. (2013). The international corporate governance system: Audit roles and board oversight.
Murphy, P. B., & Practising Law Institute. (2009). Corporate compliance and ethics institute, 2009. New York, N.Y: Practising Law Institute.
Cross, F. B., Miller, R. L. R., & Cross, F. B. (2009). The legal environment of business: Text and cases : ethical, regulatory, global, and e-commerce issues. Mason, OH: South-Western Cengage Learning.