Federal Court Analyzes SEC – BofA Settlement

Earlier this month the Securities and Exchange Commission and Bank of America reached a settlement in the SEC’s investigation of the bank relating to the propriety of disclosures it made last year during its $50 billion acquisition of Merrill Lynch. The SEC alleged that BofA had mislead its shareholders about $5 billion in bonuses that Merrill paid to employees last year.

The bank’s knowledge and acquiescence in the bonuses has been the focus of both congressional and SEC inquiries. The merger of the banking and brokerage giants took place at the instigation of federal reserve and treasury officials. Merrill paid the bonuses although catastrophic losses at the brokerage house had taken place and would help to force Bank of America to seek $45 billion in federal bail out monies to keep solvent.

Bank of America and the SEC reached a consent agreement requiring the bank to pay $33 million to settle its SEC charges without admitting or denying the allegations.

The focus of the SEC’s action involves disclosures BofA made in its proxy statement concerning the acquisition of Merrill. The statements advised BofA investors that Merrill had agreed to forgo year-end bonus payments before closing the deal unless Bank of America consented. The SEC contends that the proxy statement failed to include the material fact that at the time of the proxy Bank of America already knew and had agreed to Merrill paying almost $6 million in year-end bonuses.

Two weeks ago the federal district court judge presiding over the case in New York demanded that the parties provide greater detail to the court about the bank’s failure to disclose the bonuses. Federal District Court Judge Jed Rakoff said that the proposed $33 million settlement seemed “strangely askew.” He requested information identifying the names of the individuals within BofA who knew of the bonuses and were responsible for authorizing their payment. The judge questioned the fact that the SEC had only brought an action against the corporate entity but no individuals at the bank. Moreover, the judge pointed out that the bonuses appear to have been paid using taxpayer money.

In its response the bank did not identify the names of any bank personnel involved in the decision not to include the information in the proxy materials. Instead, it identified two law firms as advisers to it and Merrill Lynch during the merger. The bank maintained that there was no false or misleading information in the proxy disclosures. It pointed to Merrill Lynch financial statements (not part of the proxy) showing that funds similar to the amount in the prior year had been set aside for bonuses, thus constructively providing shareholders with notice.

The SEC claimed that its settlement with the bank was an appropriate arms-length negotiation. Moreover, the Commission sought to emphasize that the central violation by the bank was inadequate disclosure about the bonuses and not misuse of government funds. It also agreed that the bank executives were not to blame. Instead, the SEC blamed the law firms retained by BofA and Merrill.

Now each party will have two weeks to respond to the filing of the other party. If the court refuses to approve the settlement, the parties will either attempt to negotiate a new agreement or appeal the matter to the U.S. Court of Appeals for the Second Circuit.

For further details please see The New York Times, “Bank Case on Bonuses Shifts Focus to Lawyers,” August 25, 2009.

About Richard Serafini

Welcome to my blog. I am an attorney and practice in the area of corporate trial work. Areas of particular emphasis are white collar defense, securities litigation, health care litigation, internal investigations, RICO, and financial litigation. I will be posting interesting developments in my areas of interest. I hope that you find this blog helpful and informative.