Judge Jed Rakoff, a Federal District Judge in lower Manhattan today rejected the $33 million settlement between Bank of America and the SEC over $4 billion in bonuses paid to Merrill employees days before the Bank of America/Merrill merger closed.

In rejecting the settlment, Judge Rakoff stated that it "does not comport with the most elementary notions of justice and morality." In perhaps the most coherent summary of the chananigans that seem to happen on Wall Street, the judge stated:

"In other word, the parties were proposing that the management of Bank of America - having already hidden from the Bank's shareholders that as much as $5.8 billion of their money would be given as bonuses to the executives of Merrill Lynch who had run that company nearly into bankruptcy - would now settle the consequences of their lying by paying the S.E.C. $33 million more of their shareholders' money. 

I recommend that anyone who owns shares in a public company read the document. Unlike many legal decisions, this one is crystal clear and easy to digest. It shows just how murky corporate governance has become.

Here's another gem from Judge Rakoff's decision:

"Overall, indeed. the parties' submissions, when carefully read, leave the distinct impression that the proposed Consent Judgement was a contrivance designed to provide the S.E.C. with the facade of enforcement and the management of the Bank with a quick resolution of an embarassing inquiry - all at the expense of the sole alleged victims, the shareholders."

The decision then asks why the S.E.C. didn't persue penalities agains the actual actors in the potential crime - Bank management or the lawyers who helped put together the proxy.

It also ruled that the fine "if looked at from the standpoint of the violation, is also inadequate, in that $33 million is a trivial penalty for a false statement that materially impacted a multi-billion-dollar-merger."

I applaud Judge Rakoff. If Bank of America management are guilty, then they should be personally penalized. If the facts exonerate them, then that's okay also. But to have the kind of decision proposed by the S.E.C. not only buries the truth, but it hurts shareholders, and encourages management to plunder shareholder wealth.

While Congress and the Executive Branch largely give Wall Street a pass, judges have been taking a much harder stand and not simply rubber-stamping decisions that benefit the potential perpetrators.

Still, it's clear any investor who relies on the S.E.C. to enforce fairness in the financial markets is deluding him or herself.

The full settlement can be read below.

Judge's Rejection of S.E.C.-Bank of America Settlement