Federal judge declines to approve BoA-SEC settlement

Thomas Coyle

7 August 2009

The bank doesn't say whether it would use TARP funds to end the case. A U.S. federal court judge has refused to approve Bank of America's proposal to pay $33 million to lay to rest U.S. regulators' claims that it made "materially false and misleading claims" to shareholders about bonuses paid to Merrill Lynch executives for 2008 -- on the grounds that the Charlotte, N.C.-based bank didn't say how much of the fine came from funds re-directed from the U.S. government's Troubled Asset Relief Program (TARP).

The SEC is after Bank of America for fibbing to shareholders in the run-up to its $50-billion purchase of Merrill early in January 2009. In fact, Bank of America said in proxy materials to its shareholders describing the deal and soliciting their approval that it wouldn't pay year-end performance bonuses "or other discretionary compensation" to Merrill executives before the acquisition was completed.

New hearing

In fact, Bank of America waited until afterthe deal was done before paying bonuses to Merrill executives -- as, say U.S. watchdogs, it had secretly agreed to do before seeming to mislead its shareholders.

On Wall Street, year-end bonuses often come in the new year; sometimes as late as March.

"On November 3, 2008, in a joint proxy statement soliciting votes from the shareholders of both companies, Bank of America represented that Merrill had agreed not to pay year-end performance bonuses or other discretionary incentive compensation to its executives prior to the closing of the merger without Bank of America's consent," the SEC said in a mid January 2009 complaint. "In fact, contrary to the representation in the merger agreement, Bank of America had agreed that Merrill could pay up to $5.8 billion -- nearly 12% of the total consideration to be exchanged in the merger -- in discretionary year-end and other bonuses to Merrill executives for 2008."

In the event, Bank of America paid about $3.6 billion in 2008 bonuses to Merrill executives in January 2009. Merrill lost $27.6 billion in 2008 -- it's worst year ever.

In proposing to settle the matter with a payment of $33 million, Bank of America emphasized that it was neither admitting or denying the SEC's allegations in the matter.

But late on Wednesday this week, U.S. federal district court judge Jed Ratkoff refused to approve the settlement on the grounds that it ""would leave uncertain the truth of the very serious allegations made in the complaint," and leave open the question that Bank of America, which has taken around $45 billion in TARP handouts, including $20 billion sent its way a few weeks after it paid the Merrill-exec bonuses, was attempting to use public money to settle the matter.

Ratkoff has scheduled a hearing into Bank of America's proposed settlement for Monday. -FWR

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