Legal News

In Rejecting SEC Settlement, Has Pauley Pulled a Rakoff?

By Ashby Jones

Has New York federal judge William H. Pauley III pulled a Rakoff?

We ask the question in light of a page-one story in Thursday’s WSJ story on a ruling made by Pauley on Monday, in which he rejected a proposed change to a settlement that was designed to end abuses on Wall Street. Click here for the story; here for Pauley’s ruling.

The backstory goes like this: In 2003, the SEC reached a settlement with 12 Wall Street firms, a group that includes Goldman Sachs, Morgan Stanley, and Merrill Lynch, which is now part of Bank of America. The settlement, hailed as a landmark at the time, put strict curbs on what stock analysts at those institutions could do, and with whom they could communicate within their employers’ other divisions.

The WSJ’s Sue Craig describes the settlement this way:

The settlement came in the wake of the bursting of the technology-stock bubble, which was caused in part by overly optimistic reports from Wall Street analysts that sent stocks soaring. After the bust, it was revealed that many of those analysts were touting stocks at the behest of their firms’ investment-banking operations, which were profiting from initial public offerings. One solution to the conflict of interest was separating the analysts from the investment-banking operations.

But last August, the SEC and the banks tried to undo that portion of the $1.4 billion settlement that erected a wall between the bankers and the analysts.

Pauley indicated on Monday that he’ll have none of it. He wrote that “the parties’ proposed modification would deconstruct the firewall between research analysts and investment bankers erected by the parties when they settled these actions.” Approving the request, he continued, “would be inconsistent with” the settlement “and contrary to the public interest.”

The move is reminiscent of Manhattan federal judge Jed Rakoff’s recent refusal to sign off on a settlement between the SEC and Bank of America over bonuses paid to Merrill executives shortly after the two merged. (Rakoff ultimately approved a modified settlement.)

SEC spokesman John Nester said the agency believes there are other restrictions in place, such as keeping analysts and bankers physically separate and prohibiting bankers from influencing analyst coverage decisions.

But some outsiders were wondering just what has gotten into the SEC’s drinking water. “I am all for judges being the hero, but isn’t the SEC supposed to be?” said James D. Cox, a law professor at Duke University. “The issue of communication between analysts and bankers was at the heart of the entire issue that led to the global settlement. My initial question is: Who at the SEC allowed this to happen?”

Full post as published by Law Blog - WSJ.com on March 18, 2010 (boomark / email).