The logic of Judge Rakoff is clean, whether one likes the consequence or not, so does his math. In rendering his decision on the Consent Judgment in S.E.C v Bank of America he considered the proposed agreement unfair, unreasonable and inadequate. According to the facts in the case, in the proxy statement that the Bank of America made to its shareholders for their approval of the merger with Merrill Lynch, it represented “…that Merrill had agreed not to pay year-end performance bonuses or other discretionary compensation to its executives prior to the closing of the merger without Bank of America’s consent” …what turned out not to be true. The S.E.C discovers this little problem (thus too late), wields its regulatory sword on the agreement and threats to sanction Bank of America. Short of issuing the sanction, the SEC and the Bank strike an agreement to reduce it: the Bank pays a fine of US$33 Million dollars and is not expected to accept or deny the charges. This is the agreement the Judge was asked to give his blessing on.
In denying his blessing, the Judge questions who wins with this arrangement: if shareholders of the Bank where robbed once with the lie, they would be robbed twice with the agreement with the S.E.C: why should they pay for their manager’s (or lawyers thereof) wrongdoing? The math is also clear: the executives’ bonuses were worth $5.8 billion of shareholders’ money which adds to the agreed sanction that totalled an additional $33million of their money. It’s like adding insult to injury. The judgment suggests first, that the correct thing to do would be to go against whomever orchestrated the “lie”, and second, the S.E.C should not settle agreements that would cover the fact they simply reacted late and did poorly on their own regulatory and oversight functions. Judge Rakoff puts it squarely: “…the parties’ submissions, when carefully read, leave the distinct impression that the proposed Consent Judgment was a contrivance designed to provide the S.E.C with the façade of enforcement and the management and the management of the Bank with a quick resolution of an embarrassing inquiry – all at the expense of the sole alleged victims, the shareholders.” Appearances or not, the point is, is the damage repaired or further wrong doing prevented by this agreed sanction?
The judgment was not without criticism, but one would think there would at least be some learning effect…only not. Let’s take Siemens, for example. In 2008 a corruption scandal that involved Siemens emerged to light. Siemens confessed wrong doing and acts of bribery to secure contracts; this dealt particularly with a contract to provide Argentina with identity cards. The bribes related to this project were close to US$31 million dollars. Siemens got fined in the US and Germany and started to work on its repentance, which included firing managers who allegedly endorsed the bribery or at least knew of it.
An interesting anecdote is that precisely because of this contract Siemens had initiated in 2005 an international arbitration at the International Centre for Settlement of Investment Disputes -ICSID against Argentina alleging they had not fulfilled its commitments and had treated them unfairly all in violation of the German-Argentina Bilateral Investment Treaty. During the arbitral proceedings the corruption issue was not raised and not dealt with by the Tribunal ( despite huge red flags) who ordered in 2007 that Argentina should pay some US $217 Million dollars in compensation, and about US $219 Million on unpaid bills plus the US$20 Million performance bond of what actually was a corrupt contract. Argentine sought to halt the award’s enforcement and to have that award annulled. Later, in November 2008 as Siemens’ confession emerged, the annulment procedure was stopped and in September 2009 it was announced that Siemens and Argentina had reached an agreement whereby Siemens waived its rights to enforce this 2007 award ( note this is different from accepting its annulment), and it is reported that as part of the agreement both waived their rights to “pursue further legal actions arising out of the earlier contract dispute” and that “each side will bear its own legal costs and fees associated with the long-running saga at ICSID”. The truth of the matter is that corruption alone should have been enough to finish the arbitration proceedings earlier than 2007, and that in such case it is most likely that the enforcement of the corrupt contract would not have been the expected Tribunal’s decision. At this point let’s do the math here not for Siemens’ shareholders but for Argentina’s shareholders (a.k.a citizens and tax payers): because of a corrupt contract the Argentinean’s lost 1) What their government paid Siemens already for the identity card contract; 2) What their government had to pay in lawyers and arbitrators fees for the ICSID tribunal; 3) What their government didn’t do while focused on the identity card project and its defence afterwards; all of this, at a minimum. The trouble is that to top the current of costs from spiralling, Argentina had to agree to stop any other further claim so…only judging from this public information, it looks like there is little hope for Argentinean shareholders to get some justice at this end.
On September 2009 Siemens announced a plea bargain with its former managers and Board members involved in the bribery scandal that came out in 2008. The deal entails they each pay the company €500 thousand for their wrong doing and in exchange they are left in peace…in their new jobs. Let’s ask who wins with this arrangement: the company recovers some money; the former managers lose some money and the Argentineans still have a problem with their identity cards. Is the damage repaired by this action? For Siemens shareholders: partially; in addition they are lucky enough to own a company that had an insurance that may cover it against the corrupt acts of its managers. For Argentinean shareholders: by no means, at least not that I know of; besides, I am almost sure the Argentineans are not insured against the corrupt acts of their politicians.
The truth is that the international prosecution system, if it is feasible to give this name to the current patchwork of prosecution cases outside of the counties that were the scene of the crime, is perhaps one of the few ways to prosecute economic crime effectively. This is good. The problem is such “system” is as far from the victims of corruption as it could be. Where is the Judge Rakoff of international corruption crimes? Is criminal responsibility of legal persons really working if companies can be insured for acts of bribery of their managers? What happens to the victims of corruption? Are they also lost in the enforcement system? Is it really enough to prosecute if sanctioning stops short of recovering damage for victims? Can damage coming out of corruption be repaired at all? Or should we all sit and feel contempt with self pity?
 Jed S. Rakoff, USDJ. SEC v Bank of America Corporation. 09 Civ 6829 (JSR). Memorandum Order. United States District Court, Southern District of New York. Excerpt of the Complaint as quoted in the decision. P1.
 Ibid p 8.
 See Investment Arbitration Reporter. http://www.iareporter.com/Archive/IAR-07-28-08.pdf
 See note on Reuters of September 23 2009 under http://www.reuters.com/article/rbssIndustryMaterialsUtilitiesNews/idUSLN52337520090923
 See Süddeutscheszeitung’s article of September 6 2009 http://www.sueddeutsche.de/wirtschaft/208/486621/text/ and also in Businessweek on September 23, 2009 http://www.businessweek.com/ap/financialnews/D9AT05OG0.htm