While we are on the topic of strange SEC settlements, consider the one announced yesterday, in which Bank of America agreed to pay a $33 million penalty for making "materially false and misleading statements" in a proxy statement filed with the SEC on November 3, 2008. The SEC complains that Merrill Lynch, which was being taken over by Bank of America, paid out $3.6 billion in bonuses for 2008 despite having lost $27.6 billion that year.
The federal government, under the "capital purchase program" of the Troubled Asset Relief Program, had invested $15 billion of Bank of America on October 28, 2008, in return for preferred stock and warrants. So it was a company significantly owned by the government that was engaging in the "materially false and misleading statements." The government invested another $10 billion on January 9, and another $20 billion under the "Targeted Investment Program" on January 16, for a total investment of $45 billion, or about a third of Bank of America's current stock-market capitalization. The government apparently felt it had sufficient power to threaten to remove the bank's chief executive.
All this raises some questions. If the government feels these bonuses are so inappropriate, why not claw them back, rather than impose a fine on the shareholders of Bank of America? That would punish the bonus recipients rather than the bank's shareholders, who have already suffered quite a bit. Since the federal government already in effect owns a third of Bank of America, imposing a fine on the bank is kind of like a person taking money out of one pocket and putting it into another pocket. The $33 million is chickenfeed, anyway, compared to the $3.6 billion in bonuses. What's more, if the SEC alleges that the people being misled were the proxy recipients, i.e., the shareholders, why not compensate the shareholders by giving them the $33 million, or, better yet, the $3.6 billion, rather than by punishing the victims, the misled shareholders, by taking the money from them and giving it to the U.S. Treasury? The non-governmental Bank of America shareholders get, arguably, a raw deal under this settlement, because the government shareholder gets the penalty money back in its other (S.E.C.) pocket, while the non-government shareholders are out their share of the $33 million, even though they were the ones who received the supposedly misleading proxy materials.
If sorting this out seems complicated, it's because the federal government is serving simultaneously as regulator of the bank and its part owner, while trying to maintain the appearance that the bank is an independent business. The Obama administration gets to have it both ways. By imposing the SEC penalty, it can maintain the appearance that it disapproves of big bonuses at money-losing Wall Street firms that get bailed out by the government. But by stopping short of making the bankers give back the bonuses, it can avoid the disruptive consequences that such a move would impose on a business it is now a big owner of. Meanwhile, Bank of America's non-government shareholders are stuck paying a share of the government-imposed penalty for approving a deal done at the government's behest and on the basis of what the government now says was a misleading proxy filed by a firm in which the government was a significant investor.