U.S. District Judge Jed Rakoff in Manhattan ordered federal regulators to explain why they didn’t investigate whether executives at Bank of America Corp. (BAC) misled shareholders about bonuses paid by Merrill Lynch.
Rakoff delayed the approval of Bank of America’s proposed $33 million settlement with the Securities and Exchange Commission (SEC) over the bonus affair, which arose after the bank’s acquisition of Merrill Lynch in September 2008 for $50 billion.
The SEC charged that a proxy statement by Bank of America in November misled investors as it stated that Merrill Lynch would not pay year-end bonuses without Bank of America’s consent. However, Bank of America had already authorized Merrill Lynch 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 Lynch deal materially false and misleading.
The Securities and Exchange Commission reached the settlement with the bank last month. Bank of America agreed to pay $33 million in proposed fine to settle the charges. However, it neither admitted nor denied the allegations. Both, the SEC and the bank defended the settlement as fair in their filings.
Merrill Lynch paid a huge $3.6 billion in bonuses last year, even though it lost $27.6 billion in the same year. Those losses in turn affected Bank of America’s bottom line after its takeover was completed.
The SEC said in a filing that the evidence it gathered did not support additional corporate charges against Bank of America or charges against individual executives arising from the bonus payouts. The SEC mentioned that it was not able to determine whether Bank of America’s executives deliberately violated securities laws as the terms of the takeover of Merrill Lynch as well as the bonus payments were laid out in documents prepared by outside attorneys for the two companies.
Rakoff responded that the lawyers should be held legally responsible if they actually made the decisions that resulted in a false (disclosure) statement.
Bank of America indicated that disclosure of bonuses would not have made any material effect on the outcome of the shareholder vote to approve the Merrill Lynch acquisition. The company had presented the strategic logic of the Bank of America and Merrill Lynch combination to its shareholders, and the shareholders approved the transaction based on that logic. Bank of America also suggested that shareholders should have already known about the bonuses given the media attention surrounding its takeover of Merrill Lynch.
Rakoff has set a deadline of Sept 9 for the two parties 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.
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