The digging by the New York attorney general, Andrew Cuomo, into the bonuses paid by Merrill Lynch immediately prior to the closing of its acquisition by Bank of America, are starting to take an interesting turn.
The proximate cause is that the bonuses were unseemly and unwarranted, which doesn’t form the basis for legal action., but was enough for New York and North Carolina to launch investigations. But New York is now starting to hit some pay dirt. From the Wall Street Journal:
Bank of America Chairman and Chief Executive Kenneth Lewis was issued a subpoena by New York State Attorney General Andrew Cuomo, who is investigating whether the bank withheld information from investors in violation of state law, according to people familiar with the matter.
Mr. Lewis, who received the subpoena late last week, is the highest-profile subject of Mr. Cuomo’s investigation into the Charlotte, N.C., bank’s purchase of Merrill Lynch & Co. on Jan. 1. Mr. Cuomo’s office is trying to determine if investors were misled about the depth of Merrill’s losses in late 2008 and whether details of the bonuses to Merrill employees, contained in a nonpublic document, should have been disclosed to investors….
In particular, they wanted to know why the September merger agreement contained a nonpublic attachment that outlined the maximum Merrill could pay.
Now even with my rather creaky knowledge of securities laws, it sounds as if these state law violations would run afoul of federal securities law. So where is the SEC? Asleep at the wheel, of course. The SEC loves going after insider trading (it’s always young, not hugely well connected perps) and after Madoff, has suddenly decided it had better take interest in hedge funds or other investment vehicles claiming too good or too consistent to be true returns. But that still leaves out a whole bunch of securities law breeches.
And before you trot out the argument that the SEC is too understaffed to go after all the miscreants, let us turn the mike over to Cuomo’s predecessor, Eliot Spitzer:
The traditional critiques of the SEC have been that it was underfunded and didn’t have up-to-date laws needed to regulate sophisticated financial transactions in evolving markets. That’s not accurate. The SEC is a gargantuan bureaucracy of 3,500 employees and a budget of $900 million—vast compared with the offices that actually did ferret out fraud in the marketplace. And the general investigative powers of the SEC are so broad that it needs no additional statutory power to delve into virtually any market activity that it suspects is improper, fraudulent, or deceptive. After each business scandal (Enron, Wall Street analysts, Madoff …), the SEC claims a need for more money and statutory power, yet those don’t help. The SEC has all the money and people and laws it needs. For ideological reasons, it just didn’t want to do its job, and on the rare occasions when it did, it didn’t know how.
So while we are glad to see someone going after securities fraud, this is hardly the most important instance. What about our favorite hobby horse, the obviously misleading financials published by Lehman before its collapse? And while Lehman is (hopefully) an extreme case, we have no doubt it has plenty of company. Cleaning up banks includes cleaning up their financial disclosure, and there seems to be perilous little progress on that front.