It has been a long time coming. The road has been difficult and very rough. The obstacles were considerable. The end, however, is in sight and may prove very worthwhile. The SEC and Bank of America have almost reached the position they thought they were in weeks ago – settlement.

On Monday, U.S. District Judge Jed Rakoff tentatively approved the latest version of the settlement between the two parties, subject only submission of the final papers modified pursuant to suggestions by the Court. This will resolve the two SEC suits against the bank for not disclosing to shareholders when voting on the acquisition of Merrill Lynch by the bank billions of dollars in approved bonuses for executives of the broker and unprecedented fourth quarter losses which undermined the value of the deal.

After reviewing significant portions of the discovery record to evaluate the conflicting claims between the SEC and the New York Attorney General’s case, the court walked carefully between the conflicting versions. Judge Rakoff had raised questions about the significant differences between the SEC and the bank’s version and that of the New York AG regarding the failure to disclose the huge Merrill bonuses and losses and the reason the bank’s General Counsel was fired. While taking care not to endorse either view, the Court allowed that there was a reasonable basis for the prosecutorial judgments made by the SEC.

Nevertheless, in giving tentative approval to the settlement the Court detailed key principles which the SEC would do well to heed in the future. The proposed settlement consists of a $150 million fine to be distributed back to shareholders through a Fair Fund arrangement and certain corporate governance procedures designed to improve the disclosure process at the bank. Judge Rakoff allowed that these terms were much better than those in the initial settlement which consisted only of a $33 million fine and no corporate governance procedures. If, however, the matter was being considered against a clean slate the Court made it clear that the settlement would not be approved, calling it “far from ideal” at one point and “inadequate and misguided” at another.

Throughout its opinion, the court repeatedly returned to two points. One focused on the culture of Bank of America. In describing the process which produced decisions not to disclose the bonuses and the mounting Merrill losses, the Court noted that there was an “apparent working assumption of the Bank’s decision-makers and lawyers involved in the underlying events at issue here . . . not to disclose information if a rationale could be found for not doing so . . .” In this regard, Judge Rakoff noted that the proposed corporate governance procedures, which focus in large measure on improving the disclosure processes at the bank, “are helpful, so far as they go, and may help to render less likely the kind of piecemeal and mincing approach to public disclosure that led to the Bank’s problems in the instant case.” The proposed modifications by the Court which will be in the final papers are designed to strengthen these procedures.

A second point focused on the penalty. Here, the Court noted that while the penalty is modest for both cases in light of the facts, the “more fundamental problem, however, is that a fine assessed against the Bank, taken by itself, penalizes the shareholders for what was, in effect if not in intent a fraud by management on the shareholders. This was among the major reasons the Court rejected the earlier proposed settlement.” Under the circumstances here, where management deceives its shareholders “a fine most directly serves its deterrent purposes if it is assessed against the persons responsible for the deception. If such persons acted out of negligence, rather than ban faith, that should be a mitigating factor . . .” The fact that the fine will be distributed through the Fair Fund provisions of Sarbanes Oxley does not really change this fact. In the end since neither the fine, nor the remedial measures are directed at the specific individuals involved, meaning that their impact is likely to be “very modest” and results in “half-baked justice . . .”

When the final papers are presented in a few days, the Court made it clear that they will be approved. This is consistent with the Court’s limited role which it described as to “balk” when the bank tries to escape the implications of its conduct and to “protect” when a regulatory agency seeks only modest and misguided sanctions.

In the end, what could have been the SEC’s most prominent market crisis case to date turns out to be otherwise. At the same time, if the principles in the Court’s opinion are followed in future actions, the rough ride will prove more than worthwhile.