Federal judge rejects SEC-Bank of America settlement, orders trial

A judge in the US District Court for the Southern District of New York on Monday rejected a $33 million settlement agreement between the Securities and Exchange Commission (SEC) and Bank of America (BOA). The SEC had charged BOA with misleading investors regarding billions of dollars paid to Merrill Lynch executives during the acquisition of the firm. Judge Jed Rakoff rejected the settlement agreement and ordered a trial on the SEC's allegations, finding that it was unfair to shareholders:

It is not fair, first and foremost, because it does not comport with the most elementary notions of justice and morality, in that it proposes that the shareholders who were the victims of the Bank's alleged misconduct now pay the penalty for that misconduct. The SEC admits that the corporate penalties it here proposes will be "indirectly borne by [the] shareholders." But the SEC argues that this is justified because "[a] corporate penalty ... sends a strong signal to shareholders that unsatisfactory corporate conduct has occurred and allows shareholders to better assess the quality and performance of management." This hypothesis, however, makes no sense when applied to the facts here: for the notion that Bank of America shareholders, having been lied to blatantly in connection with the multi-billion-dollar purchase of a huge, nearly-bankrupt company, need to lose another $33 million of their money in order to "better assess the quality and performance of management" is absurd.

Rakoff set a trial date for February 1.

Rakoff previously refused to accept the settlement agreement. The SEC complaint alleged that, during the merger of the two companies, the agreement for BOA to allow Merrill Lynch to pay discretionary bonuses was located in a separate document that was not disclosed prior to the shareholders' vote on the merger.

The agreement allowed Merrill Lynch to pay up to $5.8 billion of the $50 billion merger consideration as executive bonuses. Ultimately, $3.6 billion in bonuses were paid to Merrill Lynch executives despite record losses in 2008. BOA agreed to settle with the SEC and pay a $33 million penalty but did not admit or deny the allegations.

(Published by Jurist - September 14, 2009)

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