BofA Says Shareholders Knew of Merrill Bonuses

Bank of America's answer to an amended federal suit in Manhattan contends that BofA did not hide $5.6 billion in bonuses for Merrill Lynch executives to get shareholder approval for its $50 billion federal-bailout-backed rescue of the investment bank because the bonuses were public knowledge.

The Securities and Exchange Commission's amended complaint, filed Oct. 19 in the U.S. District Court for the Southern District of New York, charges that the bank gained approval from shareholders to acquire the foundering Merrill Lynch through "material misrepresentations" in its disclosures about the deal.

The suit says BofA violated federal securities laws governing proxy solicitation by telling investors that Merrill would not pay any bonuses without the approval of the Charlotte, N.C.-based bank chain. However, before those proxy materials were mailed, BofA's top officers already had secretly approved up to $5.6 billion in bonuses for Merrill executives, the SEC alleges.

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 says.

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 claims.

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, U.S. District Judge Jed Rakoff declined to sign off on the pact on three occasions. He questioned why BofA agreed to use money from the investors and why the SEC accepted the deal in apparent violation of its own policy to sue the responsible individuals, rather than the corporate entity, in this type of case.

As a result trial was set for Feb. 1, 2010, and the SEC filed the amended complaint.

However, the new version differs little from the original and still does not name the BofA officers and directors who were allegedly responsible for deceiving the shareholders, which was one of Judge Rakoff's prime objections.

The amended complaint adds some specifics concerning the alleged proxy violation, claiming that BofA:

• Failed to include in the proxy materials all information a shareholder would need to make an informed decision on the merger;
• Sent out proxies with disclosures that were false and misleading; and
• Violated proxy procedure by failing to supply accurate information on time.

The bank denies the charges.

"Bank of America and Merrill Lynch publicly disclosed, as part of the proxy statement and elsewhere, that Merrill Lynch was continuing to accrue compensation and benefits expenses in 2008 at a rate similar to 2007 and that numerous media outlets, in newspapers, on television and over the Internet, reported that Merrill Lynch was expected to pay multi-billions in year-end incentive compensation for 2008," BofA's answer says.

In affirmative defenses, the bank contends that the amended complaint fails to:

• State a claim on which relief can be granted;
• Show that the proxy statement contains any statements that were false or misleading;
• Demonstrate that the proxy statement omitted any material facts;
• Show that the proxy materials excluded any material information;
• Show that BofA was negligent in preparing the proxy statement; and
• Prove that the bank did not rely in good faith on the advice of counsel.

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

The SEC is represented by David Rosenfeld, George Stepaniuk, Maureen Lewis, Wendy Griffin, Scott Black, Alexander Vasilescu and Joseph Boryshansky of the agency's New York office.BofA is represented by Lewis Liman, Victor Hou, Melissa Marler and Shawn Chen of Cleary Gottlieb Steen & Hamilton in New York; Mark Pomerantz, Theodore Wells Jr., Brad Karp and Daniel Kramer of Paul Weiss Rifkind Wharton & Garrison in New York; and Alex Young K. Oh of the firm's Washington office.

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Securities and Exchange Commission v. Bank of America Corp., No. 09-6829, answer to amended complaint filed (S.D.N.Y. Oct. 30, 2009).
Corporate Officers & Directors Liability Litigation Reporter
Volume 25, Issue 10
11/04/2009

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