Federal Judge Withholds Approval of SEC-Bank of America Settlement

Despite acknowledging the public importance of an SEC enforcement action against Bank of America, a federal judge (SD NY) said that the proposed consent judgment would leave uncertain the truth of the very serious SEC allegations. 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 bailout. The court will hold a hearing to hear from the parties with respect to their proposed consent judgment. SEC v. Bank of America, SD NY, Litigation Release No. 21164.

The SEC charged the bank with making materially false statements in a joint proxy statement that it filed with Merrill Lynch & Co., Inc. in connection with the bank’s $50 billion acquisition of Merrill Lynch. Among other things, the SEC said that the bank falsely represented to both its own shareholders and to the Merrill Lynch shareholders that Merrill had agreed not to pay year-end bonuses to the firm’s executives when, in fact, the bank had agreed that Merrill could pay such bonuses up to as much as $5.8 billion. As a result, according to the SEC’s complaint, Merrill paid $3.6 billion in bonuses in the face of a record loss of $27.8 billion in 2008.

The SEC alleged that the merger agreement was included as an appendix and summarized in the joint proxy statement that was distributed to all 283,000 shareholders of both companies. But Bank of America's agreement to allow Merrill to pay these discretionary bonuses was in a separate document that was omitted from the proxy statement and whose contents were never disclosed before the shareholders' vote on the merger.

In tandem with the complaint, the parties filed a proposed consent judgment by which, among other things, the bank, without admitting or denying the allegations, agreed to pay a civil penalty in the amount of $33 million and agreed the entry of a judgment that permanently enjoins it from violating the proxy solicitation rules.

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