UPDATE 2-Judge questions SEC $150 mln accord with BofA

Mon Feb 8, 2010 4:56pm EST

* Rakoff questions if $150 mln accord addresses concerns

* Judge calls SEC, Cuomo view of case strikingly different

* Bank of America shares fall 3.5 pct (New throughout)

By Jonathan Stempel

NEW YORK, Feb 8 (Reuters) - The federal judge who rejected a U.S. government settlement with Bank of America Corp (BAC.N) over its takeover of Merrill Lynch & Co questioned on Monday whether a revised $150 million accord still unfairly punished shareholders.

U.S. District Judge Jed Rakoff said he would decide by Feb. 19 whether to approve the revised accord, which also calls for improvements in corporate governance and disclosure, including on matters of executive pay.

Rakoff called these proposals on the whole "quite positive," while asking whether the court should have a role in hiring an independent pay consultant.

If approved, the settlement would resolve two lawsuits by the Securities and Exchange Commission against the largest U.S. bank over the Jan. 1, 2009, merger, including one suit scheduled to go to trial on March 1.

Monday's hearing came four days after New York Attorney General Andrew Cuomo filed civil fraud charges against the bank, former Chief Executive Kenneth Lewis and former Chief Financial Officer Joe Price over the merger.

Cuomo alleged that the defendants misled shareholders about Merrill's soaring losses ahead of a Dec. 5, 2008, shareholder vote on the merger, and also misled the federal government so that they could extract $20 billion of federal bailout money.

Rakoff in September rejected a $33 million accord as too low, as unfair in that it would have forced shareholders to pay a fine, and defective because it failed to hold any individual executives, directors or lawyers responsible.

That rejection proved embarrassing for the SEC and for Charlotte, North Carolina-based Bank of America, which agreed to buy Merrill after less than 48 hours of talks, on the same morning Lehman Brothers Holdings Inc LEHMQ.PK went bankrupt.

'CIRCULARITY'

The latest agreement differs in that the $150 million would be paid by the bank into a fund to be distributed to shareholders, but Rakoff questioned whether that would satisfy his concerns.

"Why should shareholders pay shareholders?" Rakoff asked. "There's a circularity, at least in part, to this proposal."

George Canellos, regional director of the SEC's regional office in New York, responded that the sum would compensate shareholders who might have voted against the merger or demanded a lower price had they known of Merrill's losses.

"I don't think there is any issue of victims paying victims," he said.

The governance and disclosure changes would give shareholders a voice on executive pay, imposing tighter rules on directors who set such pay and posting incentive pay practices prominently on the bank's website.

Rakoff said he will pose specific questions to both sides by Feb. 11, with responses due by Feb. 16. Bank of America spokesman Bob Stickler said the bank will respond promptly to the questions, and looks forward to a "rapid resolution."

ROLE OF GENERAL COUNSEL

In its lawsuits, the SEC accused the bank of hiding Merrill's mounting fourth-quarter 2008 losses, and misleading shareholders about the $3.6 billion of bonuses it let Merrill pay in 2008. The quarterly loss ultimately totaled $15.8 billion.

Rakoff noted that the charges were "strikingly different" from Cuomo's, pointing out the attorney general's allegation that Bank of America's conduct was "motivated by self-interest, greed, hubris, and a palpable sense that the normal rules of fair play did not apply."

Rakoff said he will review the events surrounding the departure of general counsel Timothy Mayopoulos from Bank of America, and the role of the bank's law firm Wachtell Lipton Rosen & Katz LLP in deciding what to tell shareholders.

Cuomo alleged that Mayopoulos was fired on Dec. 10, 2008, after having been misled about the scope of Merrill's losses, and confronting Price following the Dec. 5 shareholder vote about those losses.

Canellos suggested that the replacement of Mayopoulos as general counsel by Brian Moynihan, now Bank of America's chief executive, may have been motivated by "a bit of a fire drill" at the bank to keep the latter from leaving the company.

He said the alternative would have been for Moynihan to be replaced at the bank by Merrill's chief executive, John Thain. The latter eventually left the bank, and was on Sunday named chief executive of finance company CIT Group Inc (CIT.N).

Moynihan eventually gave up the general counsel job and became head of consumer and small business banking, a position now held by Price.

Bank of America shares closed down 52 cents, or 3.5 percent, at $14.48 on the New York Stock Exchange.

The federal cases are SEC v. Bank of America Corp, U.S. District Court, Southern District of New York, Nos, 09-06829 and 10-00215. Cuomo's case is New York v. Bank of America Corp et al, New York State Supreme Court, New York County, No. 450115/2010. (Additional reporting by Joe Rauch; Editing by Tim Dobbyn and Steve Orlofsky)

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