naked capitalism

The Merrill-Bank of America bonus row took an interesting turn. As readers may recall, Merrill paid bonuses prior to the closing of its purchase by Bank of America, which was earlier than they would have been issued had Merrill remained independent. That timeframe was also when Bank of America was threatening to break the deal, which lead to a an additional bailout package from the Fed and Treasury.

The regulatory beef was that Bank of America made what were alleged to be misleading disclosures in its proxy statements to shareholders on the deal, specifically, that they had said Merrill would not pay out year end bonuses when in fact Bank of America had agreed to as much as $5.8 billion (the actual amount was $3.6 billion) . The bank and the SEC reached a settlement that had the Charlotte bank pay $33 million fines. The judge nixed that, not simply for the lack of rationale for the size of the fine, but its public importance, given the bailout money the bank received. From the Wall Street Journal:

The SEC complaint, filed Monday in U.S. District Court in New York, found fault with proxy documents that Bank of America and Merrill sent to their respective shareholders in November 2008 to vote on the $50 billion takeover. The SEC said the documents show Merrill wouldn’t pay year-end bonuses or other compensation before the deal closed without Bank of America’s consent. According to the complaint, the bank had already agreed that Merrill could pay such bonuses up to $5.8 billion.

In an order issued Wednesday, Judge Rakoff wrote: “Despite the public importance of this case, the proposed consent judgment would leave uncertain the truth of the very serious allegations made in the complaint.” He said the proposed settlement “in no way specifies the basis for the $33 million figure or whether any of this money is derived directly or indirectly from the $20 billion in public funds previously advanced to Bank of America as part of its ‘bailout.’ “

The parties have to show up before the judge next Monday and explain themselves.

Update: A Wall Street Journal story raises the specter of a second disclosure failure not included in the SEC complaint, namely, that BofA had increased its loss projections for Merrill prior to the shareholder vote on the deal, but decided the deterioration wasn’t serious enough to warrant disclosure. Some experts and observers beg to differ:

James Cox, a professor of corporate and securities law at Duke University, said it “is highly likely” that a change of $2 billion in Merrill’s forecasted net losses “would be material, but it is even more likely to be material if this was indicative of conditions at Merrill that were deteriorating.”…

Rep. Dennis Kucinich (D., Ohio) urged the SEC in a letter Tuesday to expand its probe of the bank for possible securities-law violations.