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NEW YORK (Reuters) - A federal judge refused to approve a settlement between a top U.S. regulator and Bank of America Corp (BAC.N) over executive bonuses, the latest twist in the bank's star-crossed takeover of Merrill Lynch & Co.
The decision late Wednesday by Judge Jed Rakoff of the U.S. District Court in Manhattan that the $33 million settlement could be unfair to the public was an unusual step, lawyers said.
It comes on the heels of months of shareholder anger, a boardroom overhaul, and billions of dollars of losses since Bank of America completed the Merrill takeover on January 1.
The settlement was intended to resolve an SEC civil lawsuit accusing the bank of making false and misleading statements to shareholders about bonuses promised to Merrill employees. Bank of America and the U.S. Securities and Exchange Commission will now attend an August 10 hearing to answer the judge's questions.
"It certainly is a rare instance when a federal judge refuses to approve a settlement in a case, particularly at its initial filing," said Jacob Frenkel, a former SEC enforcement lawyer and now a partner at Shulman, Rogers, Gandal, Pordy & Ecker PA in Rockville, Maryland.
Spokesmen for Charlotte, North Carolina-based Bank of America and the SEC said they "look forward" to answering Rakoff's questions at the hearing.
Lawyers said Rakoff will focus on whether the fine is in the public's interest, particularly given that Bank of America has taken $45 billion of taxpayer funds from the federal Troubled Asset Relief Program.
"This fine is small in comparison to even the bonuses that Bank of America is probably still paying," said James Cox, a securities law professor at Duke University. "We ought to be looking at the individuals who were the players here."
The merger has been an albatross for Kenneth Lewis, who has been Bank of America's chief executive since 2001. Since April, he has lost his job as chairman, and more than half of his long-supportive board of directors has departed. The bank's shares have fallen by half since the merger was announced.
In its complaint, the SEC alleged that Bank of America had authorized Merrill to pay up to $5.8 billion in bonuses, despite telling investors in proxy documents that Merrill had agreed not to award year-end performance bonuses or incentive pay before the merger closed.
Merrill would ultimately pay $3.6 billion, according to regulators. Two weeks after the merger closed, losses at Merrill prompted Bank of America to accept $20 billion of bailout money, on top of its earlier $25 billion.
"Despite the public importance of this case, the proposed consent judgment would leave uncertain the truth of the very serious allegations made in the complaint," Rakoff wrote in his two-page order.
"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 judge added.
The penalty was below the $50 million that General Electric Co (GE.N) agreed to pay Tuesday to settle SEC fraud charges.
Rakoff has refused to sign off on a big SEC settlement before. In 2003, he blocked a $500 million settlement with WorldCom Inc over the accounting fraud that led to the phone company's bankruptcy. He later approved a $750 million payout.
Duke University's Cox expects the Bank of America settlement to win approval. "The public interest is not likely to be found jeopardized or harmed by the fine that's going to be imposed," he said.
The Wall Street Journal, citing company e-mails and people familiar with the situation, said Bank of America's loss projections for Merrill bulged by nearly $2 billion in the two days before both companies' shareholders approved the merger.
It said the bank's executives nevertheless decided the losses were not severe enough to warrant disclosure to shareholders. The newspaper said bank spokesman Robert Stickler said the revelations "support what we have said all along."
The case is SEC v. Bank of America Corp, U.S. District Court, Southern District of New York (Manhattan), No. 09-6829.
Reporting by Jonathan Stempel with additional reporting by Ajay Kamalakaran in Bangalore, Rachelle Younglai in Washington and Elinor Comlay in New York; Editing by Gerald E. McCormick,John Wallace and Leslie Gevirtz