August 25, 2009 / 9:43 PM / 10 years ago

UPDATE 3-US judge tells BofA, SEC to reveal more on bonuses

* Judge asks why bank settled if it did nothing wrong

* Judge says “puzzling” that SEC okayed bank statements

* Bank of America shares rise 2.3 percent (Recasts; adds outside comments, details from judge’s order, background, bylines)

By Jonathan Stempel and Joe Rauch

NEW YORK, Aug 25 (Reuters) - A federal judge ordered Bank of America (BAC.N) to explain why it agreed to pay $33 million to settle a U.S. Securities and Exchange Commission lawsuit if it believed it properly disclosed bonuses it authorized for Merrill Lynch & Co employees.

A day after receiving arguments from both sides about the proposed settlement, U.S. District Judge Jed Rakoff questioned the bank’s willingness to settle, saying that if it was “to curry favor with the SEC or to avoid retaliation by the SEC, the court needs to know the specifics.”

The judge, however, also questioned the SEC effort to end its civil case, suggesting it might be unreasonable to let off company executives and their lawyers without penalty.

By questioning motivations behind the Aug. 3 settlement, the judge threw a spotlight on regulators’ willingness to settle with companies that do not admit wrongdoing.

“The deal is the complete opposite of transparency,” said David Lewin, a corporate governance professor at the University of California at Los Angeles’ Anderson School of Management. “There are a lot of decisions on these kinds of disclosure issues right now, and some you can argue the merits of. But I don’t think this one is even close.”

The judge directed both the SEC and the largest U.S. bank to make further submissions by Sept. 9. It remains unclear whether he will approve the settlement. Bank of America bought Merrill on Jan. 1.

“Rakoff raised the age-old question of who really should pay the price of a SEC settlement,” said Jacob Frenkel, former SEC enforcement lawyer and now a partner at Shulman, Rogers, Gandal, Pordy & Ecker PA in Rockville, Maryland. “It could cause the agency to rethink its approach.”

SEC spokesman Kevin Callahan said the agency would provide Rakoff with the information he requested.

Bank of America spokesman Larry Di Rita said the lender “presented the shareholders the strategic logic of the Bank of America and Merrill Lynch combination, and we believe that is what shareholders were voting for.”


Bank of America had told Rakoff on Monday that it did not mislead shareholders about its approval of up to $5.8 billion of bonuses at Merrill for 2008.

The Charlotte, North Carolina-based bank added that it was “widely understood” from Merrill’s filings and press reports that Merrill would pay out billions of dollars, despite a full-year $27.6 billion net loss.

Meanwhile, the SEC contended that while Bank of America was wrong not to tell shareholders about the payouts, the settlement strikes a fair balance that deters further wrongdoing without punishing shareholders.

Rakoff, though, said it was “puzzling” that the regulator accepted statements by bank executives that they relied on their lawyers as to what disclosures were made.

According to the SEC, Bank of America Chief Executive Kenneth Lewis, Merrill Chief Executive John Thain and the top merger negotiators said preparation of the proxy statement was made by lawyers including the banks’ outside law firms — Wachtell, Lipton, Rosen & Katz, and Shearman & Sterling LLP.

But the judge said it is “at war with common sense” for executives to rely on lawyers without having their companies waive attorney-client privilege, leaving “beyond scrutiny” the responsibility of both company executives and lawyers.

He said this leaves open whether, “if it was actually the lawyers who made the decisions that resulted in a false proxy statement, they should be held legally responsible.”

Wachtell and Shearman did not immediately return requests for comment.

Shares of Bank of America closed Tuesday up 40 cents at $17.75 on the New York Stock Exchange.

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 and Joe Rauch; Additional reporting by Elinor Comlay in New York and Rachelle Younglai in Washington, D.C.; Editing by Steve Orlofsky, Richard Chang and Bernard Orr)

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