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.
I have called for the Congress to have the modern-day equivalent of the Pecora Commission of 1933-34.
Even if the SEC were toothful, a public airing is needed- with immunity not granted.
Glad you’re watching this one for us, Yves.
"What about our favorite hobby horse, the obviously misleading financials published by Lehman before its collapse?"
You could say the same thing of GS too, only they were bailed out. Without the bailout they were finished. Same for MS.
Also, did BAC file an 8k for this material change in the merger?
"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."
02/17/2009 H Filed
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That's why a bunch of states are lining up to tell Uncle they are sick of this crap.
I have called for the Congress to have…”
so THAT’s why the line is always busy
When does Mr. Geithner get a subpoena? He was the one with the shotgun at the wedding.
Mr. Lewis at the press conference following the “merger” announcement, “…you don’t push back on the fed…”
Mr. Lewis will fall on his sword and all on Wall st will say he took all of the bad with him.
Didn’t think Cuomo had it in him.
I sincerely hope Cuomo intends to follow through aggressively. I’m always leery to get too encouraged by reports which suggest the wheels of justice are turning. These subpoenas can just as easily lead to political exonerations. Still Cuomo seems like a lone gun in a desert of cronyism.
oh – have I missed it, but seems the fraud set up between the ratings agencies and the institutions whose securities they were rating has been completely put out of mind.
Also – I was harping about this last night – Obama has repeatedly said, not just in the context torture and domestic spying, but in terms of culpability for the financial meltdown, that it is more important to look forward than backward. Which, in terms of the financial world, struck me as a bit rash. Obama in theory could make the argument that he as a former senator is familiar with the actions that took place regarding torture and spying and so can make a judgement from perspective (which is a stretch in my book – but this is for the sake of argument). But there is no possible way he has any insight into the scope of fraud or how deep the rabbit hole goes through the institutions and govt agencies. I wish I had a quote from him, but the last I recall it might have been on the day Giethner unfurled his bank rescue hodgepodge.
(and to highlight I am not being unfair to Obama, I donated to his campaign, although I did not vote for him after his FISA vote)
scope of financial fraud
rabbit hole of responsibility
I’m outraged! But suffering from global financial melt-down fatigue.
I think I am getting physically ill from the whole affair. Unfortunately we can’t just start shooting the guilty. There at least would be an end-point.
Essentially you are saying ‘we are all screwed’, the government is in cahoots with these finance criminals and nothing will really be done about any of it.
An absurd and disgusting sideshow of (apparently) unscrupulous banksters and grandstanding politicians.
Granted. But where is the illegality? Why should the SEC be involved?
Contempt Of Congress, Obstruction Of Justice, falsifying information, wire fraud, aiding and abetting, and yes, where in God’s name is the highly corrupt and dysfunctional SEC, DOJ, FBI, Congress???
When these suckers are brought to jail and treated as financial terrorists, and held without being charged and no possibility of bail, these people will begin to plea bargain, and they will spill the beans — which is what needs to friggn happen in the morning, not in the next decade!
Has anyone seen my pike?
If I were Andrew Cuomo, I’d subpoeana Kenneth Lewis’ passport, just in case he gets any funy ideas. Keeping him a few days in county jail, with the pimps and the hookers, might improve his cooperation with the investigation too…
Um, didn’t you know that securities laws very clearly require disclosure of material information? If there is a material change between regular quarterly filings, a reporting entity is required to file a form 8-K.
I used to be able to recite the particular language in my sleep, but can not longer recite the exact provisions of the Securities Act of 1933, but trust me, it’s required and if what the Journal says is accurate, these would be pretty clear securities law violations.
The ’33 Act also prohibits misstatements and omissions, BTW.
Yves, I happen to be wearing my securities law breeches at the moment and I can confirm that you are right. Failure to disclose material information in an 8-K triggers liability under Section 10(b) and Rule 10b-5 of the Securities and Exchange Act of 1934.
This line of attack should be equally valid for Lehman, Goldman, Bear and probably Citi as well. I cannot understand what the SEC Enforcement Division is doing, unless they have decided to prioritize outright fraud (Madoff, Stanford and plenty more to come) over failure to disclose material information.
It’s the LEMON BROTHERS model of lemon banking where there is no disclosure at all.
I think that executive pay is such a hot issue that Cuomo can’t be pushed aside. It is his wedge which will open the can of worms and establish his de facto right to go after the banking sleeze based on mis-information to the public. This has to be done if NYC is to keep its place as the financial center. BoA is itself a great target as it is a non-NYC bank :)
Eliot Spitzer, Cuomo’s predecessor, was known as the Sheriff of Wall Street. Somebody paid for the hit on Spitzer using leaked GJ testimony. So that Somebody is a cop-killer who Cuomo is going to get. (That somebody was in the DoJ. But how high up?)
And if successful the investigation is Cuomo’s ticket to Albany or Washington
Simpson and Yves,
Perhaps I am being an optimist (at the very least I have a tendency to give the benefit) but perhaps there will be accountability. We have some folks from Worldcom, Enron and Tyco in jails today. It was almost 5 years before the Skilling verdict came in.
We are in triage mode right now, and I think it is correct that the SEC is looking for more Stanfords before they string up all the Fulds.
Don’t pretend I am trying to defend incompetence. I am not.
But the truth commissions will come soon enough. The crescendo will peak only after some innocents are discovered in the gallows.
I think it is obvious to almost everyone (including the politicians) that there were material ommissions, falsifications, and bald face dissembling going on.
I was at an event in Seattle tonight, and people were whispering that one of the attendees was the ex Wamu CEO who ruined so many lives. I went up and introduced myself. It wasn’t him. But that Salem witch trial atmosphere is growing.
And the truthiness will set us free.
We are in triage mode right now, and I think it is correct that the SEC is looking for more Stanfords before they string up all the Fulds.
SEC find him[?], was it not the risk analyst Alex Dalmady a Venezuelan financial analyst, who uncovered the Allen Stanford Fraud by doing a favor for a friend which was thinking of investing that did the job for them, or do they (SEC&Fed) have to be so oblique, and leak it so far away to stop internal tip offs, Moles/Rats every where.
If they question anyone and the perp gets cute I have some Nigerian video of what they do to thieves, involving petrol, tires and pipes. Leave them with me for a few Min's in a room and all will be forthcoming, my dead Friends have some questions of theirs too and I owe them that much. Any one that had their fingers in the pie, whilst good men die, can forget my empathies.
My question is, how did the SEC allow this to get so bad, with Madoffs and Stanfords running all over the place? Is this sheer incompetence, plain stupidity, overt corruption, or just business as usual on the behalf of this government? If anything, they need to serve pink slips to all those 3500 lazy and incompetent SEC employees. I have yet to see one government official be held responsible for anything.
Are we in the calligula period of the US empire?
If you look at the complaint on Stanford, you will see that the SEC was investigating him as far back as 2003 but that the investigation was quashed by an unnamed Federal agency. Was it the Fed? My guess is that it was the funny buggers out in McLean and that they were getting some good Venezuela intel from his bank.
@Simpson said… Was it the Fed? My guess is that it was the funny buggers out in McLean and that they were getting some good Venezuela intel from his bank….
For my 2 cents, Mami worked so well D.C. co-oped it. Stanford playing spy for the Gov, I think not, if I read you correctly.
I am with those (annoymous at 10:57) who wonder about the truthiness of the gubermint types. First off, the bonuses were outrageous!!! But, was Paulson telling the truth? (I am willing to believe that he actually is that stupid, or maybe more charitibly, clueless) What about the legality of forcing banks to sign a statement and take 25 billion? Was Lewis forced, er I mean, encouraged, to buy Merrill?
is Bernanke telling the truth when he expects growth to resume soon? By the rules government has set up (accounting, reserves), a number of banks are insolvent. Using the criteria that Cuomo has set for Lewis, would a perfectly objective, true, honorable prosecutor not also indict Fed and Treasury officials?
A criminal investigation into the staff at the SEC needs to look at their bank accouts onshore and offshore, financial assets, jobs past employees have moved onto, etc, to open this whole can of worms up to the public, Its a discrace.
Fres – Why no spying? Soon there’ll be a connection between financial fraud and CIA financing. Who needs to launder money more than our own agency? Think Iran-Contra. We’re due for a repeat.
Despite the noise from Cuomo, I believe the most relevant information is in the public domain if you know where to look. This is a link to the merger agreement between ML and BAC: http://www.ir.ml.com/secfiling.cfm?filingID=950123-08-11151.
Payment of bonuses is specifically permitted if done in the ordinary course of business consistent with past practice. Section 3.8(c). This takes care of commissions but not the bulk of controversial bonuses.
Payments of anything other than base salaries by ML is prohibited by Section 5.2(c)(ii). This obligation and other reps and obligations are required to be confirmed in writing prior to closing. Section 7.2. Payment of the bonuses would allow BAC to terminate pursuant to Section 8.1(d), but only if the breach reuslts in a material adverse effect on ML. Section 9.2.
Since ML established an allowance for bonuses in their accounts during the course of the year, payment of the bonus would not result in a MAE as defined by Section 3.8(a). Therefore the bonuses are paid and Thain or the CFO signs the bring down certificate at closing and there is no breach.
Section 5.1 says that ML cannot do anything that impairs their relations with regulators. So Ken Lewis goes to Washington to make his case. Paulson and Bernanke want no part of the mess, so he’s stuck and the deal closes.
The accounting losses are also contemplated. Changes to asset marks that are the result of changes in background economic circumstances are specifically carved out from the definition of MAE. Section 3.8(a)(i)(D).
Painful for BAC and their shareholders, but not a basis for terminating the merger. And while it may be possible to demonstrate that there were some underlying problems with the marks not associated with economic conditions, that is a difficult egg to unscramble. Certainly not something Lewis is likely to bet the company on.
The disclosure schedule with employment contract information Cuomo is crowing about is a non-issue. These are not regularly in the public domain. Maybe they should be, but there is little support in current federal securities case law for that proposition.
NY case law is thin, since it has generally been suprseded by federal laws. Cuomo is playing on that uncertainty to shame Lewis and/or Thain into settling. Thain is a free agent, so no reason to settle. Therefore the witch hunt will focus on Lewis with a basic theme of “how could you have been so stupid”.
Bottom line: the bargain BAC struck did not contemplate that they would get to keep the bonus compensation that ML accrued during the course of the year. Letting them keep it would have been a windfall to their shareholders.
As is often the case, the scandal here is what’s legal.
Thanks for your reply, but I was asking specifically about payment of the bonuses — sorry if that was not clear. After all, isn’t this what some members of Congress are (most) upset about? Is it against the law for a company that loses money, even a lot of money, to pay its executives bonuses? Is there any provision in the original TARP legislation — via which, I presume, these banks got the money — that specifically prohibits payment of bonuses?
Regarding this whole mess, also important IMO has been the failure of Boards of Directors. Nothing but corrupt, useless lackeys. Reform — or something — seems definitely needed there.
The conduct of BOA may or may not be a US securities law violation, and the question of whether it is or isn’t will some day make an interesting law school case. Cuomo, however, has the advantage of the Martin Act, which penalizes conduct that Federal law clearly does not reach. Depending on your point of view, the availability of the Martin Act can be a good idea (personally, I think it rides roughshod over defendants rights), but if you want BoA hung out to dry, then Cuomo has powers Congress would never give the SEC.
SEC conspiracy and collusion; hang them too ASAP!!! We need to put people back to work making pikes for the heads on wall street, and then people to work the head choppers and people to round up the banker families …. well, yah know, that was a bit much I guess, but IMHO we need to see some Enron-like discovery here or things will get nasty. If confidence is not restored with accountability, people may just take matters into their own hands someday … I could be wrong, but as The SEC continues to look like a bunch of crooks and pirates who are in bed with Bernanke, Paulson, Timmy, Bush, Obama and thousands of corporate parasites who are hell-bent on stealing more and more and more cash from taxpayers — where do you all think this will go …. huh, huh, where, tll me please, I need to friggn know …….ahhhhhhhh..