US SEC-BofA accord could be scuttled by judge

WASHINGTON Feb 4 (Reuters) - The top U.S. securities regulator faces an uphill battle convincing a federal judge that its latest effort to hold Bank of America Corp (BAC.N) accountable for misleading shareholders about the 2008 takeover of Merrill Lynch & Co is fair.

The U.S. Securities and Exchange Commission on Thursday proposed that the bank pay $150 million into a fund to be distributed to shareholders. The agreement is designed to resolve charges that the bank hid Merrill's soaring losses and its authorization of $3.6 billion in bonuses to the brokerage's executives.

U.S. District Judge Jed Rakoff will now consider the settlement, which would end the SEC's two federal lawsuits over the merger against the largest U.S. bank.

Rakoff rejected the SEC's proposed $33 million accord with the bank in September, saying it penalized shareholders and failed to hold individuals accountable for wrongdoing.

While the latest proposal may address the first of these concerns, it appears to do nothing to address the second.

"I don't see it as a good settlement because it doesn't address Rakoff concerns. The lawyers are off the hook and the money is coming out of investors' pockets," said Elizabeth Nowicki, a visiting law professor at Boston University.

In addition to paying $150 million to harmed shareholders, Bank of America agreed to improve disclosure and corporate governance.

As was the case with the settlement Rakoff rejected, the SEC did not charge any individuals at the bank for misleading investors. The agency has said that although Bank of America executives discussed the firm's disclosure obligations with its lawyers, they did not deliberately conceal the information or intend to mislead investors.

But also on Thursday, New York Attorney General Andrew Cuomo accused former Bank of America Chief Executive Kenneth Lewis and former Chief Financial Officer Joe Price of failing to disclose the massive fourth-quarter losses at Merrill. [ID:nN0499983]

After the merger closed in January 2009, Bank of America reported Merrill had lost $15.8 billion that quarter.

"I am truly baffled. How does taking more money out of Bank of America enable Rakoff to sleep better at night when he was upset before that the shareholders would have to pay?" said James Cox, a securities law professor at Duke University. "Now the shareholders will have to pay more."

Rakoff's rejection of the earlier settlement was an embarrassment for the SEC, which under Chairman Mary Schapiro has been aggressively pursuing enforcement cases after the Bernard Madoff scandal.

Rakoff also rejected the SEC's effort to expand the lawsuit to include the Merrill losses, although he told the agency there was no impediment to pursuing those charges in a separate complaint.

Some former SEC officials believe the new agreement will address the judge's concerns.

"This, in my view, is a settlement that is designed -- first, last and throughout -- to protect and benefit the BofA shareholders," said former SEC Chairman Harvey Pitt.

Jacob Frenkel, a former SEC enforcement lawyer and now a partner at Shulman Rogers Gandal Pordy & Ecker, said the new deal will be harder for Rakoff to reject.

"The broader message is that the SEC understands his displeasure and has gone back to revisit his concerns," he said.

Rakoff is scheduled to hold a hearing on the settlement on Monday afternoon. (Reporting by Rachelle Younglai, editing by Leslie Gevirtz)