Corporations in the Dock: Addendum

Bank of America’s nearly $17 billion settlement with the Justice Department, announced yesterday, has all the evils I blogged about previously, plus a new ingredient. Once again, no individual is cited as having behaved criminally (though it has been reported that the government is getting set to charge Angelo Mozilo, Countrywide Mortgage’s former CEO). And once again, no thought seems to have been given to compensating investors who were victimized by BofA’s supposed criminal acts, though the government will be compensated—and then some—for money HFA and HUD lost insuring dud mortgages from BofA.

The new wrinkle here is that most of the conduct cited by the government was committed by Countrywide and Merrill Lynch before those companies were acquired by BofA in 2008. It’s standard corporate law that a surviving company is liable for the acts and obligations of an acquired company, but that makes little sense in the criminal context.

One possible explanation advanced for penalizing stockholders for a company’s sins is that the prospect of criminal penalties will encourage stockholders to prevent illicit conduct. Given the limited abilities stockholder have to influence corporate conduct, it’s not much of an argument. But when the conduct occurs before an offending company is acquired (and the acquisition is for cash so that stockholders of the acquired company do not become stockholders of the acquiring company), the stockholders of the acquiring company could not possibly have prevented the criminal acts.

—Stan