Merrill's Settlement of Bonus Suit Strikes Out for Third Time

In a scathing decision, a federal judge in New York has rejected for the third time a proposed $33 million settlement of charges that Bank of America's $50 billion federal-bailout-backed rescue of Merrill Lynch hid $5.8 billion in executive bonuses.

U.S. District Judge Jed Rakoff of the Southern District of New York said the proposed pact is "worse than pointless" because "it proposes that the shareholders who were the victims of [BofA's] alleged misconduct now pay the penalty" for the BofA officers' alleged "lies" about the bonuses.

The judge said the settlement of the Securities and Exchange Commission's charges would be "not only at the expense of the shareholders, but also of the truth." However, he added that "the truth may still emerge" at a trial scheduled to start Feb. 1, 2010.

According to press reports, the judge's rejection of the settlement has spurred:

• A subpoena from New York Attorney General Andrew Cuomo that requires five BofA directors to testify under oath about the approval and disclosure of the Merrill bonuses; and
• Scrutiny by the U.S. House of Representatives' Oversight and Government Reform Committee, which will hold a hearing Sept. 30 on the federal government's oversight of the Merrill merger deal.

In a statement to the press, BofA said it will "cooperate with the attorney general's office as we maintain that there is no basis for charges against either the company or individual members of the management team."

The SEC claims that the bank gained approval from shareholders to acquire the foundering Merrill Lynch through "material misrepresentations" in its disclosures about the deal.

BofA told investors that Merrill would not pay any bonuses without the approval of the Charlotte, N.C.-based bank chain, but the SEC's complaint charges that before those proxy materials were mailed, BofA's top officers already had secretly approved up to $5.6 billion in bonuses for Merrill executives.

That amounted to nearly 12 percent of the total $50 billion that BofA paid for Merrill using funds from the $700 billion federal bank rescue program, the agency said.

Ultimately, Merrill gave out $3.8 billion to its employees for 2008, even though it lost $27.6 billion, but BofA concealed those figures until after the merger, the SEC claimed.

By the time the SEC filed its complaint Aug. 3, BofA already had agreed to settle and only needed the court's approval to put the matter to rest.

However, Judge Rakoff declined to sign off on the pact that day and again Aug. 24 after additional briefing because of questions about why the bank agreed to use money from the shareholders and why the SEC accepted the deal in apparent violation of its own policy to sue the responsible individuals in this type of case.

In a second round of briefing, the SEC said that even though it might normally sue the officers who made the false statements, it could not support a case against the BofA executives without evidence that they actually made the key decisions.

BofA had agreed not to dispute the securities fraud charges but in a brief in support of the settlement, it claimed that it made no false statements to the shareholders.

Further, it said the officers relied on the advice of their lawyers as to bonuses and the statements about them. However, BofA claimed that details of that advice are protected by attorney-client privilege.

"If that is the case," Judge Rakoff said in his Sept. 14 ruling, "why are the penalties not then sought against the lawyers, and why, in any event, does that justify imposing penalties on the victims of the lie, the shareholders?"

BofA says it agreed to pay $33 million that belongs to the shareholders - and ultimately the U.S. taxpayers - to avoid long and costly litigation, but it appears that decision was made by the very officers who would otherwise be personally liable for that violation of the federal securities laws, the judge said.

The settlement appears to be "a contrivance designed to provide the SEC with the façe of enforcement and the management of the bank with a quick resolution of an embarrassing inquiry - all at the expense of the shareholders," the judge wrote. "It is worse than pointless: it further victimizes the victims."

To comment, ask questions or contribute articles, contact West.Andrews.Editor@ThomsonReuters.com.

The SEC is represented by David Rosenfeld, George Stepaniuk, Maureen Lewis and Joseph Borysansky of the agency's New York office.BofA is represented by Lewis Liman and Shawn Chen of Cleary Gottlieb Steen & Hamilton in New York.