NEW YORK (Reuters) - Bank of America Corp won approval of a $150 million settlement with the U.S. Securities and Exchange Commission over the Merrill Lynch & Co merger, though the federal judge who signed off on the accord called it “half-baked justice at best.”
The settlement ends an embarrassing battle between Bank of America and the top U.S. securities regulator over the January 2009 takeover, and averts a trial that had been scheduled to begin next Monday.
Yet in approving the settlement, U.S. District Judge Jed Rakoff in Manhattan may have given new ammunition to the many lawsuits against the largest U.S. bank over the merger, including one filed by New York Attorney General Andrew Cuomo.
Rakoff said it was clear that the bank, prior to a shareholder vote on the merger, failed to adequately disclose the scope of Merrill’s “historically great” losses, and that it authorized Merrill to pay as much as $5.8 billion of bonuses.
“Despite the bank’s somewhat coy refusal to concede the materiality of these nondisclosures, it seems obvious that a prudent bank shareholder, if informed of the aforementioned facts, would have thought twice about approving the merger or might have sought its renegotiation,” he said.
But the judge said the law required him to give “substantial deference” to the SEC in approving the accord.
Bank of America spokesman Bob Stickler said the bank was “very pleased” that Rakoff accepted the settlement.
SEC spokesman John Nester said the settlement is “fair, reasonable, and in the best interest of investors.” He said it “sends a strong message” that companies give shareholders the information they need to vote on corporate transactions.
Cuomo’s office had no immediate comment.
The SEC had filed two lawsuits against Bank of America, saying it misled shareholders about Merrill’s bonus payouts, which ultimately totaled $3.6 billion, and losses, which totaled $15.8 billion in the fourth quarter of 2008.
The judge rejected a $33 million accord over the bonuses in September, faulting the SEC for accepting a lenient penalty that failed to hold individuals responsible.
“Bank of America might have won a settlement, but in the big picture, it lost,” said Elizabeth Nowicki, a visiting professor at Boston University School of Law.
“Judge Rakoff’s acceptance of the settlement is actually as damning as his rejection would have been,” she added. “Shareholders in other lawsuits will have guidance on how best to go forward, and will have encouragement from how poorly a jurist viewed the actions of Bank of America executives.”
Among these lawsuits is a shareholder class-action case before another Manhattan federal judge, led by Ohio Attorney General Richard Cordray on behalf of several pension funds.
“There is much that is helpful to us” in Rakoff’s ruling, Cordray said in an interview. “A federal judge has found specifically that Bank of America failed to adequately disclose the agreements to make bonus payments, and the widening losses at Merrill. Those issues are the heart and soul of our case.”
Rakoff’s approval requires both sides to file a revised settlement reflecting changes they had accepted by February 25.
Bank of America shares rose 33 cents, or 2.1 percent, to $16.21 in Monday trading on the New York Stock Exchange.
The judge said he accepted the settlement despite its “very modest punitive, compensatory, and remedial measures that are neither directed at the specific individuals responsible for the nondisclosures nor appear likely to have more than a very modest impact on corporate practices or victim compensation.
“While better than nothing,” Rakoff went on, “this is half-baked justice at best.”
Rakoff also faulted the “modest” $150 million fine, which he said “penalizes the shareholders for what was in effect, if not in intent, a fraud by management on the shareholders.”
The settlement also includes governance reforms, including requiring the bank to give shareholders a voice on executive pay and to publicly disclose incentive pay practices.
It does not let the SEC and the court help choose a pay consultant, an idea that Rakoff had proposed and which Charlotte, North Carolina-based Bank of America had rejected.
Still, Rakoff declined to block the accord on this ground, saying judges should not to “impose their own preferences.” Rakoff was appointed to the bench by President Bill Clinton.
Cuomo sued the bank, its former chief executive, Kenneth Lewis, and its former chief financial officer, Joe Price, who now oversees consumer and small business banking on February 4.
That lawsuit sets forth a significantly different set of facts, including that the bank in mid-December 2008 used an “empty threat” of backing out of the merger as leverage to get taxpayer aid from the government.
Bank of America has said the government forced it to go through with the merger. It ultimately received $20 billion of federal bailout money, which it has since repaid.
Cuomo also called into question the facts behind the decision to fire general counsel Tim Mayopoulos just as the bank’s worry over Merrill’s losses was morphing into alarm.
The SEC accepted the bank’s argument that Mayopoulos was let go to keep Brian Moynihan, who was being displaced as corporate and investment banking chief, from leaving the company. Moynihan is now the bank’s chief executive.
Rakoff said he had not determined who was right, but said there was “substantial evidence” to support the SEC’s view.
The judge said the case reminded him of a comment by a Hall of Fame baseball player whose musings have long provided fodder in non-baseball contexts.
“Given the somewhat tortured background of these cases and the difficulties the motion presents,” Rakoff wrote, “the court is tempted to quote the great American philosopher Yogi Berra: ‘I wish I had an answer to that because I’m getting tired of answering that question.’”
The cases are SEC v. Bank of America Corp, U.S. District Court, Southern District of New York, Nos. 09-06829 and 10-00215.
Additional reporting by Grant McCool in New York; Joe Rauch in Charlotte, North Carolina; and Dan Margolies in Washington, D.C.; editing by John Wallace, Gerald E. McCormick, Leslie Gevirtz