Sept. 17 (Bloomberg) -- God bless Judge Rakoff. Somebody with clout is speaking up for the company owners.

U.S. District Court Judge Jed Rakoff in New York this week rejected Bank of America Corp.’s settlement with the Securities and Exchange Commission in the case of the surreptitious bonuses paid by Merrill Lynch & Co. before the nation’s biggest bank by assets bought the stockbroker in January.

Rakoff said the $33 million Bank of America agreed to pay was “trivial.” For goodness’ sake, the SEC had charged the bank with defrauding its own stockholders by not disclosing $3.6 billion in Merrill bonus payments when the owners voted on the takeover that cost them about $29 billion.

What’s more, if the stockholders were the ones cheated why should they be on the hook for the $33 million?

Rakoff has asked repeatedly during court proceedings why Bank of America executives and lawyers weren’t being sued. Shareholders everywhere -- who watched helplessly as richly paid executives screwed up their companies -- have to be applauding.

Instead of approving the agreement, Rakoff ordered a trial of the SEC charges to begin Feb. 1.

With Rakoff goading the parties, perhaps someone will finally take responsibility for what has been a fiasco in corporate governance.

The SEC said Bank of America had a plan in place granting as much as $5.8 billion in bonuses to Merrill staff at a time when the investment firm’s losses from subprime mortgages were mounting. The red ink for 2008 turned out to be $27.6 billion.

Under Pressure

Merrill Lynch Chief Executive Officer John Thain lost his job after the bonuses were disclosed, but it has never been clear who knew what when. Bank of America CEO Kenneth Lewis has said he was under great pressure from the government to acquire the struggling Merrill.

Bank of America officials claim they did nothing wrong, saying they wanted to settle the case to get rid of it. The bank treated the $33 million as nuisance money, backing up Rakoff’s contention that the amount agreed to by the SEC was trifling.

Rakoff’s rejection of the settlement may in the long run be as helpful to the SEC as it is to shareholders. He depicted the agreement between the bank and the agency as a “contrivance” that let management off easy without assigning blame and let the government claim victory in a high-profile enforcement case.

The SEC traditionally has ended its investigations with settlements in which companies agree to abstain from doing what they didn’t admit to doing in the first place.

Deterrent Effect

To be fair, the agency probably hasn’t had the resources to pursue cases more diligently. It figured its settlements put companies and executives up to public scorn and may have had a deterrent effect.

Maybe now the SEC -- criticized for its failures to police Wall Street and to uncover Bernard Madoff’s Ponzi scheme -- will be given the horses it needs to strive for guilty pleas rather than consent decrees.

Judge Rakoff, with his white beard and apt phrases, has the makings of a folk hero. Earlier this month, when he sentenced former Monster Worldwide Inc. Chief Operating Officer James Treacy to two years in prison for improperly accounting for backdated stock options, Rakoff said, “It is appalling, it is disgusting that this practice went on.”

In his latest opinion, Rakoff quoted Oscar Wilde’s definition of a cynic: someone who knows the price of everything but the value of nothing.

If there were more Judge Rakoffs around, perhaps there wouldn’t be so much cynicism about American business.

(David Pauly is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: David Pauly in Normandy Beach, New Jersey dpauly@bloomberg.net

Last Updated: September 16, 2009 21:00 EDT