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Judge Won't OK B of A/SEC Multimillion Settlement

Source: WSJ

Posted on 11 Aug 2009

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A federal judge has delayed a decision on whether to approve a $33 million settlement of allegations that Bank of America Corp. failed to disclose to investors that Merrill Lynch & Co. agreed to pay billions of dollars in bonuses on the evening before the merger took place.

At a hearing yesterday, U.S. District Judge Jed S. Rakoff in New York questioned lawyers from the Securities and Exchange Commission and Bank of America for more than 90 minutes about the agreement, in which Bank of America didn't admit or deny wrongdoing.

The judge said he had "continued misgivings" about the settlement and wants more information about who was responsible for the alleged wrongdoing, the basis for the settlement itself and whether an evidentiary hearing should be held to weigh the facts of the case.

"I would be less than candid if I didn't express my continued misgivings about this settlement at this stage," the judge said. "When this settlement first came to me, it seemed to be lacking, for lack of a better word, transparency. I did not know much about the facts from the complaint, I did not know much, or really anything, about the basis of the settlement."

Lawyers for the bank and the SEC will simultaneously file papers in response to the judge's request by Aug. 24 and then have a chance to file response papers by Sept. 9.

In an order scheduling Monday's hearing, Judge Rakoff said the pact as negotiated "would leave uncertain the truth of the very serious allegations made" by the SEC and that he wanted to determine whether any of the money used to pay the settlement "is derived directly or indirectly from the $20 billion" in U.S. government aid Bank of America received after the merger.

Bank of America has received $45 billion in U.S. government aid, as well as a loss-sharing agreement on $118 billion in assets.

The SEC has alleged that Bank of America told investors in proxy documents for the acquisition that Merrill Lynch agreed it wouldn't pay bonuses or other compensation to executives before the takeover deal was closed without Bank of America's consent.

In truth, according to the SEC, Bank of America had already "contractually authorized" Merrill Lynch to pay up to $5.8 billion in bonuses. Merrill Lynch ultimately paid $3.6 billion in bonuses shortly before the $50 billion merger closed Jan. 1. The investment bank reported losses of $27.6 billion in 2008.

"If Merrill Lynch had not paid out $3.6 billion, would it have had a loss of $3.6 billion less?" Judge Rakoff said.

Bank of America Chief Executive Ken Lewis has been under scrutiny over the bank's disclosures regarding the Merrill Lynch bonuses and its financial picture before the deal closing. Mr. Lewis isn't a defendant in the SEC's lawsuit.

Companies are required to disclose any market-moving information to investors. The agreement to pay these bonuses was included in a separate schedule that was omitted from the proxy statement and wasn't disclosed before the shareholder vote approving the merger on Dec. 5, 2008, the SEC said.

Lewis Liman, a lawyer for Bank of America, said the bank disagrees with the SEC and doesn't believe it violated the law. Liman said the settlement doesn't affect funds doled out to Bank of America under the Troubled Asset Relief Program or the U.S. government's investment in the bank as a result of its aid.

During the hearing, the judge questioned the adequacy of the penalty, saying if the SEC is right and Bank of America lied, is "there something not strangely askew in a fine of $33 million" given the size of the bonuses paid out? He did say the fine might be appropriate if Bank of America is right, but wanted to enter a settlement to avoid prolonged litigation.

Judge Rakoff also pushed for greater disclosure from the SEC of who might have been at fault at Bank of America and Merrill Lynch regarding the alleged failure in disclosure.

"Was it some sort of ghost or a human being?" the judge said. In particular, the judge asked whether Lewis and and John Thain, Merrill Lynch's ex-CEO, were at fault because they signed the proxy statement.

David Rosenfeld, associate director of the SEC's New York regional office, said the SEC hasn't made allegations regarding Lewis or Thain.

Scott Silvestri, a Bank of America spokesman, said the bank continues to believe the settlement is "a constructive conclusion to this issue."

After the hearing, Rosenfeld said, "We look forward to further presenting the facts of our case and providing the additional information the judge is seeking."