Rolfe Winkler of Reuters and Louise Story of the New York Times sat in on the hearings on the SEC-Bank of America settlement today. Those who have followed this little drama may recall:
Merrill paid its employees bonuses of $3.6 billion prior to the close of the deal with Bank of America. It was very clear BofA had to have authorized it (if you know anything about deals, it was inconceivable that they hadn’t)
Bank of America failed to disclose the bonus payment in the proxy filing for the deal
Judge Jed Rakoff pummeled both sides, with his questions focusing on basic issues;
Who exactly knew what when?
Why were not individuals paying fines? This failure to disclose did not drop from the sky.
Why was the settlement so low? ($33 million versus $3.6 billion)
The New York Times depicted the judge’s treatment of both sides as harsh:
During a hearing in New York that was heated at times, the judge was scathing about the settlement, in which the S.E.C. accused Bank of America of misleading its shareholders. Bank of America neither admitted nor denied wrongdoing.
Bank of America and Merrill Lynch, Judge Rakoff said, “effectively lied to their shareholders.” The $3.6 billion in bonuses paid by Merrill as the ailing brokerage giant was taken over by the bank was effectively “from Uncle Sam.”
What is amusing but also annoying is the cluelessness of both sides. I have a bit more sympathy for the SEC, only because from what little I can tell, the agency’s staff has been discouraged from taking a tough line in enforcement for a very long time. Under Arthur Levitt (1993-2001), the SEC was keen to go after certain issues (Levitt, ironically, was big on accounting, for instance), but Congress repeatedly threatened to cut the SEC budget to force Levitt to curb his efforts. The SEC during the Bush Administration was hardly a hotbed of aggressive action. It got on the dot bomb bandwagon because it was impossible not to, given Eliot Spitzer’s aggressive stance.
The SEC lawyers at least seem to be embarrassed and don’t try offering lame defenses. According to Winkler:
The judge wondered immediately why, given the “serious questions” raised in its complaint, the SEC wasn’t going after more facts. If BofA and Merrill conspired to lie to shareholders about bonuses that had been agreed to when the merger was signed, then why isn’t the SEC trying to figure out who is responsible? “Was it some sort of ghost? Who made the decision not to disclose [the bonuses]?” said Rakoff.
The lead lawyer for the SEC meekly replied that they haven’t made any allegations against specific individuals. This clearly didn’t satisfy Rakoff…
So who led the merger negotiations when the discussion of bonuses came up? The SEC offered two names: Greg Curl for BofA and Greg Fleming for Merrill. Of which the SEC says it has only spoken to one: Fleming.
Were details of those negotiations circulated to top management? Yes, Merill CEO John Thain and BofA CEO Ken Lewis were aware of them according to the SEC’s lawyers….
The judge also asked the SEC lawyers about the pathetic size of the settlement ($33 million) relative to the size of the alleged misconduct ($3.6 billion of bonuses paid). SEC lawyer David Rosenfeld seemed badly prepared for this question. He cited the Wachovia/First Union case, saying that $37 million settlement was the right precedent for this case. Again the judge was skeptical, noting it revolved around $500 million worth of misconduct. Here you have $3.6 billion.
But more to the point, Rakoff asked “why isn’t this a grossly unfair amount?” And why is it being collected from the corporation and “not from individuals responsible for orchestrating the misleading [SEC filing]?” Rosenfeld mumbled something about the degree of misconduct, the need for deterrence and finding the closest precedent in their determination that the $33 million figure is “reasonable.”
Now some readers will argue that this is proof that regulation is hopeless, and that misses key issues. First, we did once have effective regulation in the US. There has been an over 30 year effort by corporate interests and those ideologically attuned with their views to neuter regulation, by weakening rules, by undermining regulators’ moral authority, by keeping enforcers starved of budget.
This is no different than what happens when staffing is inadequate. You have too many cases spread over too few people. The pressure is to wrap up things quickly and move on. Or you get the other syndrome: extreme multitasking, with nothing done very well and everything taking too long.
And the presumed to be more on-the-ball private sector BofA counsel does not comport himself any better. And remember, BofA is the one who stands to lose here. The tone of the judge’s filing denying the settlement and calling for the hearing signaled that he regarded the settlement as inadequate. But is there any sign of real preparation in these interactions? Again, from WInkler:
But according to BofA’s lawyer Lewis Liman, they [Thain and Lewis] apparently weren’t aware of what was in “the disclosure schedule” which would have had details regarding bonuses. That schedule was supposed to be attached to the SEC filing detailing the merger. Conveniently, it wasn’t….
Liman offered some pretty pathetic arguments of his own…
People shouldn’t have been surprised by the Merrill bonuses because the company had already accrued $12 billion for that purpose through Q3.
What do you do with this? Merrill …wouldn’t have lasted long enough to PAY the bonuses had it not been for bailouts.
He argued that $3.6 billion wasn’t a lot of money. After all it worked out to an average of $91k per recipient.
“I’m glad you think $91k isn’t a lot of money,” retorted the judge…
Liman also trotted out the cliché about bonuses being necessary for “retention.” To this Rakoff responded with the obvious: “how many banks were hiring people when the bonuses were paid?”…
Last Liman argued that no one could have been misled by the bonuses because they weren’t a surprise. He waved his hands in the air suggesting it would be impossible to find anyone, anywhere in the press who didn’t expect Merrill employees to get incentive comp. This is Wall Street(!) he protested.
The judge wasn’t buying that either. From Story at the New York Times:
“Do Wall Street people expect to be paid large bonuses in years when their company lost $27 billion?”
Notice that. The attorneys have bought completely into the Wall Street entitlement argument. I genuinely don’t think this is posturing; I think BofA counsel believes it and that was a factor in the lack of serous responses.
And why shouldn’t they? Those high pay levels form a rising tide that elevates the pay of all professionals serving the high-end financiers They have a vested interest in promoting the idea that these payments were warranted, even from an effectively bankrupt firm when the industry’s health was still very poor.
The judge ordered the two sides to reconvene in two weeks. He is also considering holding a separate hearing to determine whether the bonuses were justified.