Bank of America Corp. is expected to clear a legal hurdle that tripped up Citigroup Inc. last week and has propelled it toward a risky day in court.
B of A, based in Charlotte, N.C., agreed late Monday to pay $315 million to settle a class action suit alleging that its Merrill Lynch unit made false and misleading statements about the quality of mortgage-backed securities it sold to investors.
Before B of A can write a check and rid itself of the nettlesome suit, its settlement must meet with the approval of a federal judge. Not just any federal judge but "Judge Dread." That's the nickname coined for Jed S. Rakoff of U.S. Federal Court for the Southern District of New York.
Rakoff is notoriously critical of securities-related settlements that include financial payments but no admissions of wrongdoing. It was one such proposed $285 million agreement between Citigroup and the Securities and Exchange Commission that Rakoff turned down last week. Just like in the Citi case, B of A's involves accusations of fraud involving mortgage-backed securities and proposes as a remedy a large fine but no admission of wrongdoing.
One key difference between the suits is that B of A's involves private litigation brought in the name of the Public Employees' Retirement System of Mississippi. Citi's, by contrast, involved a Securities and Exchange Commission regulatory investigation. Industry observers say Rakoff is likely to find less to object to if B of A comes to him with a settlement that is directly supported by investors.
Judge Rakoff does not comment on pending litigation, according to Matt Shahabian, a law clerks in his chambers. B of A declined to comment on Tuesday.
David Stickney, a partner at Bernstein Litowitz Berger & Grossmann LLP, who represents the mortgage investors, said in the filing Monday that the settlement of complex class action litigation "is favored by public policy and strongly encouraged by the courts."
"Although lead plaintiff and lead counsel believe that the claims asserted in the action are meritorious and that the class would ultimately prevail at trial, continued litigation against defendants posed significant risks that made any recovery for the class uncertain," Stickney wrote. He was not immediately available to comment on Tuesday.
"I find it highly unlikely in the absence of objections that Judge Rakoff or any other judge would reject a private securities litigation that returns real money to investors," says Michael Donovan, founding member of Donovan Axler LLP in Philadelphia, which represents investors in securities litigation.
"It's a well-done settlement and private litigations have a different point than SEC litigation," says Donovan, whose firm was not involved in the B of A litigation.
In objecting to the Citi-SEC settlement last week, Rakoff wrote that the agency "has a duty, inherent in its statutory mission, to see that the truth emerges; and if it fails to do so, this court must not, in the name of deference or convenience, grant judicial enforcement to the agency's contrivances."
John Coffee, a professor at Columbia University's law school who co-teaches a securities law seminar with Rakoff, says he does not think the judge would "carry over his same feelings about increased transparency to the world of private litigation."
Rakoff "is not looking at whether there is adequate transparency," says Coffee, who emphasized that he has not spoken with Rakoff about the case and is not a spokesman for the judge. "What you're really looking at is whether the settlement is fair to the class, or if it puts the interest of the plaintiffs' attorneys in getting a high fee award ahead of the class — so it's a different set of concerns."
Donovan also predicts that Rakoff would be unlikely to object to a proposed deal that has been reached after the parties held extensive arm's-length negotiations and in-person mediation sessions with a former U.S. District judge. The lawsuit had been actively litigated for nearly three years and involved an analysis of more than 20 million pages of documents and more than 75 subpoenas, according to the settlement filed late Monday with the U.S. District Court in Manhattan.
The bank is painfully familiar with the judge's rigorous approval process. In 2009, Rakoff blocked B of A's proposed $33 million settlement with the SEC over covert Merrill Lynch bonus payments. He eventually — and reluctantly — approved a revised settlement of $150 million.
For B of A, the proposed settlement with mortgage securities investors is likely covered by the insurance, which generally excludes government litigation and other regulatory actions, according to Donovan.