Financial Services Litigation & Investigation Monitor : Financial Services Lawyer & Attorney : Perkins Coie Law Firm : Government Investigations, Class Actions

The Wall Street Journal has reported that on Monday evening, U.S. District Judge Jed S. Rakoff of the Southern District of New York denied the SEC’s motion to expand charges against Bank of America in connection with the company’s 2009 merger with Merrill Lynch. A previously filed SEC suit accused the bank of concealing plans to pay billions of dollars in bonuses to employees at Merrill Lynch before shareholders were asked to approve a merger of the two firms.  Most recently, the SEC moved to amend that complaint to include allegations that Bank of America also failed to disclose “extraordinary financial losses at Merrill Lynch prior to a shareholder vote to approve a merger between the two companies.” The SEC's proposed second amended complaint alleged that Bank of America negligently failed to disclose those losses before the shareholder vote, violating its fiduciary duty to its investors and making its previous disclosures materially false and misleading.

Judge Rakoff had previously rejected a $33 million settlement between the SEC and Bank of America last fall because it failed to hold accountable any of the executives or lawyers who were allegedly responsible for omissions in documents submitted to shareholders ahead of a vote that approved the acquisition. However, the SEC still declined to charge individuals in its proposed second amended complaint, stating that the “executives are not alleged to have deliberately concealed information from counsel or otherwise acted with scienter or intent to mislead.  Nor is any counsel alleged to have acted with scienter or intent to mislead.”

In a letter addressing the SEC’s proposed second amended complaint, Bank of America’s counsel stated that “the new theories the SEC seeks to advance in this case are baseless.”  The WSJK has now reported that on Monday evening, Judge Rakoff ruled that the S.E.C. cannot amend its complaint against Bank of America a second time, but can instead file a new complaint.

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At yesterday’s hearing on BofA’s proposed $33 million settlement of an SEC civil suit, Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York continued to withhold his consent for the settlement, stating that he needs more time and information before deciding whether to approve the settlement. Judge Rakoff requested further filings by August 24th, and told the parties he would not be able to approve the settlement prior to September 9th.

The SEC’s complaint, initially filed on August 3rd, states that BofA made “materially false and misleading statements in the joint proxy statement that it filed with Merrill Lynch & Co., Inc. (“Merrill”) in connection with Bank of America’s $50 billion acquisition of Merrill on January 1, 2009.” Specifically, the SEC alleges that BofA authorized Merrill to pay up to $5.8 billion in bonuses, despite telling investors in proxy documents that Merrill had agreed not to award year-end performance bonuses or incentive pay before the merger closed. Merrill would ultimately pay $3.6 billion in bonuses, according to the SEC.

One issue on which Judge Rakoff focused his questioning was who at BofA was responsible for not disclosing that Merrill could award $5.8 billion in incentives and bonuses to employees. At one point the Judge asked David Rosenfeld, the associate regional director of the SEC’s New York office, “[w]as it some sort of ghost? Who were these people? Mr. Thain and Mr. Lewis would seem to be responsible, yes?” John Thain was the CEO at Merrill during negotiations of the sale to BofA, and Kenneth Lewis is BofA’s CEO. Rosenfeld responded, in part, that the SEC “can’t infer” misconduct from an accelerated bonus schedule.

Judge Rakoff also requested additional information on how the settlement figure of $33 million was arrived upon by the parties. “Don’t I need to know what the truth is to make a determination?” the Judge questioned. If BofA indeed broke the law by not disclosing the bonus payments in proxy materials, Judge Rakoff asked, “is there not something strangely askew in a fine of $33 million?” when compared to the billions that were paid in bonuses? Rosenfeld, on behalf of the SEC, responded that the settlement figure was “fair and reasonable” based upon prior cases.

Judge Rakoff concluded that he wants more information to determine whether the settlement amount is appropriate and whether an evidentiary hearing might be necessary, commenting that he “would be less than candid” if he didn’t “express [his] continued misgivings about the settlement at this stage.

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This afternoon at 4 p.m. EST, Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York will hold a hearing at which the SEC and Bank of America (BofA) will have to justify a proposed $33 million settlement to resolve an SEC civil suit stemming from BofA’s takeover of Merrill Lynch earlier this year.

The SEC’s complaint, initially filed on August 3rd, states that BofA made “materially false and misleading statements in the joint proxy statement that it filed with Merrill Lynch & Co., Inc. (“Merrill”) in connection with Bank of America’s $50 billion acquisition of Merrill on January 1, 2009.” Specifically, the SEC alleges that BofA authorized Merrill to pay up to $5.8 billion in bonuses, despite telling investors in proxy documents that Merrill had agreed not to award year-end performance bonuses or incentive pay before the merger closed. Merrill would ultimately pay $3.6 billion in bonuses, according to the SEC.  Two weeks after the merger was complete, losses at Merrill prompted BofA to accept $20 billion of TARP funds, on top of its earlier $25 billion.

In conjunction with the August 3rd complaint, the parties submitted a proposed Consent Judgment by which BofA, without admitting or denying the allegations, agreed to pay a penalty of $33 million. However, Judge Rakoff took issue with the proposed settlement in an August 6, 2009 Order, stating that “[d]espite the public importance of this case, the proposed Consent Judgment would leave uncertain the truth of very serious allegations made in the Complaint. Further, the proposed Consent Judgment 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 ‘bail out’.”

Today’s hearing is expected to focus on whether the $33 million settlement is in the public’s interest.  The underlying context is that shareholders and the public might get the short end of the deal twice in a row – first when they were “defrauded” by the BofA proxy statements, and then again if BofA uses TARP money to pay the fine for that fraud.

Ultimately, the settlement is expected to win Judge Rakoff’s approval if the SEC and BofA can convince him that the public’s interest is not being harmed.  In 2003, Judge Rakoff blocked a $500 million SEC settlement with WorldCom Inc. over the accounting fraud that led to the phone company's bankruptcy.  Judge Rakoff later approved a $750 million settlement of the case.

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