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Judge Wants SEC To Explain Why It Didn't Investigate BofA In Merrill Deal

First Posted: 09/26/09 06:12 AM ET Updated: 05/25/11 02:55 PM ET

Bailout Banks

WASHINGTON (AP) -- A judge on Tuesday ordered federal regulators to explain why they didn't investigate whether executives at Bank of America Corp. misled shareholders about bonuses paid by Merrill Lynch.

U.S. District Judge Jed Rakoff in Manhattan has delayed approving the bank's proposed $33 million settlement with the Securities and Exchange Commission over the bonus affair, which arose after Bank of America agreed to buy Merrill for $50 billion in a hastily arranged deal last September.

The SEC said in a filing Monday that the evidence it gathered "did not support additional corporate charges against Bank of America or charges against" individual executives stemming from the bonus payouts.

At issue is the failure of Bank of America, one of the biggest U.S. banks, to disclose the bonuses to shareholders, the SEC said. The payment of the bonuses itself didn't violate the securities laws.

In seeking approval to buy the investment bank, Bank of America told investors that Merrill would not pay year-end bonuses without Bank of America's consent. But in its complaint filed earlier this month in federal court in Manhattan, the SEC said Bank of America had already authorized Merrill to pay up to $5.8 billion in bonuses and didn't share that information with shareholders. That rendered a statement Bank of America mailed to 283,000 shareholders of both companies about the Merrill deal "materially false and misleading," the SEC has said.

Merrill ended up paying $3.6 billion in bonuses last year, even though it lost $27.6 billion that year, a record for the firm. Those losses affected Bank of America's bottom line after its takeover of the troubled investment bank was completed.

The SEC said it wasn't possible to establish whether Bank of America executives knowingly violated securities laws because the terms of the bank's takeover of Merrill -- including the bonus payments -- were laid out in documents prepared by outside attorneys for the two companies.

The attorneys were mainly responsible for drafting the Bank of America disclosure filings and the bank didn't waive the attorney-client privilege, the commission said.

Rakoff, in his order Tuesday, said the SEC's arguments seem "at war with common sense."

"It also leaves open the question of whether, if it was actually the lawyers who made the decisions that resulted in a false (disclosure) statement, they should be held legally responsible," Rakoff wrote.

He said that because it is Bank of America's attorney-client privilege that is at issue, he also wants the bank to provide its views on the subject.

Rakoff gave the two parties until Sept. 9 to file the next round of legal briefs so that he can decide whether to approve the settlement. After a period of review, Rakoff could rule or order additional hearings.

Lawrence Di Rita, a spokesman for Charlotte, N.C.-based Bank of America, said in a statement Tuesday: "In our brief to the court, we explained that disclosure of bonuses would have made no material effect on the outcome of the shareholder vote to approve the Merrill Lynch acquisition. We presented to shareholders the strategic logic of the Bank of America and Merrill Lynch combination, and we believe that is what shareholders were voting for when they approved the transaction. As the SEC advised the court in its filing, it was the (SEC's) judgment that the investigative record did not support a finding of ... willful misrepresentation by Bank of America."

SEC spokesman Kevin Callahan said the agency "will provide the court with the additional information that has been requested."

Bank of America, without admitting or denying the allegations, agreed to pay the fine to settle the charges. The SEC and the bank defended the settlement as fair in their filings Monday. Bank of America suggested that shareholders should have already known about the bonuses given the media attention surrounding its takeover of Merrill.

"There was no false or misleading statement or omission" in a proxy statement for voting shareholders, Bank of America said. In addition, the bank noted that Merrill disclosed the size of its bonus pool when it reported financial results earlier in 2008.

The SEC maintained that the proposed settlement is "fair, reasonable, adequate and squarely in the public interest." The $33 million proposed fine "fully takes account of the seriousness of the misconduct and the need for deterrence, while giving due consideration to the protection of innocent shareholders," it said.

Bank of America is one of the largest recipients of aid under the government's financial bailout program, getting $45 billion. The SEC said in its filing that the government's capital investment in the bank doesn't change the standard the agency applied in arriving at the $33 million penalty.

Bank of America has said that taxpayer money would not be used to pay the settlement.


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Filed by Ryan McCarthy  |