Judge Refuses to Approve SEC Settlement Over Merrill-Bank of America Bonuses

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.

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  1. Anonymous

    What does this say about the regulators, other than that a judge with no background in finance has acted better than the people who are PAID to defend the public's interest on the matter?

  2. Richard Kline

    If we have one real hope of reform from this discrete crisis cycle, to my mind it will come from intervention by the courts. Congress has no interest; the Exectutive has a powerful interest to oppose/bury reform. Present regulatory operations have proved their failure, capture, surrender, or constraint. It will take torts and discovery to force any real issue into a 'remedy phase.' . . . A thin reed, but the one we are left with which to whistle a tune. *mmpph*

  3. Ginger Yellow

    In what situation would a $2bn change in losses not be material? I mean, I know we've all become blase about multi-billion losses, but even so. In accounting 5% is usually the rule of thumb for material, and $2bn is a lot more than 5% of any bank's losses.

  4. SiriusPsycho

    Good job Judge, thank god for the courts !!

    Now let's see who the wing nuts are crawling out of the woodwork complaining about "activist judges" ?

  5. Cat

    The loses were large, but immaterial because the taxpayer would be on the hook for loses. Any resulting fines or class actions would be paid out of bailout funds like any other loss.

    Simple business decision, really. More examples (if one needed more) of "heads I win, tails you lose" playing out at the highest levels.

    This is what we get for allowing ourselves to become frightened of a financial collapse; we'll probably still get the collapse, but in the run-up the sociopaths running the show will walk away with about $4T (with a T) worth of bailouts and backstops, redeemable in any market anywhere in the world, forever.


  6. Lavrenti Beria

    Richard Kline,

    "A thin reed … "

    I'll say, thin reed! Judges are somehow exempt from the kind of inducements to which those in the other branches of government branches typically acceed? Not likely. Judges practically invented the idea of corruption. Zero Hedge today provides a harbinger of the kind of defense the interests of the public are likely to receive as the pool of the destitute continues to enlarge in this country:


  7. Anonymous

    The judge must have equated the case to balancing his own checkbook and inadvertently over simplified the case.

    Then there was the incentives for merging with a losing balance sheet, at the time, such as claiming the new losses toward past profitable tax years in the form of refunds.

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