A federal judge in New York got his dander up about a practice that is routine in courts around the country: making shareholders pay twice for securities fraud.

In a blistering ruling released Monday, U.S. District Judge Jed Rakoff rejected a settlement between Bank of America ( BAC - news - people ) and the Securities and Exchange Commission over $5.8 billion in bonuses it paid to Merrill Lynch employees last year, allegedly without warning shareholders. In that settlement, BofA denied lying to shareholders but agreed to pay the SEC $33 million and to never do it again.

This struck Rakoff as unfair. Why should shareholders hand the government $33 million to settle claims that management hid information from them?

“To have the victims of the violation pay an additional penalty for their own victimization was enough to give the Court pause,” Rakoff wrote in an acid 13-page ruling.

The ironic part is this is exactly what happens in most securities fraud cases. A company’s stock price falls, the class-action lawyers file a complaint, and after months of expensive pretrial jousting, the parties settle with the company’s shareholders picking up the tab. The fact that insurance is often the source of the money doesn’t change things: Insurance companies aren’t charities--they collect those payouts by increasing rates.

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