US Federal Judge Rejects BoA-SEC Settlement

Tom Coyle

10 August 2009

A US federal court judge has refused to approve Bank of America's proposal to pay $33 million to lay to rest US regulators' claims that it made "materially false and misleading claims" to shareholders about bonuses paid to Merrill Lynch executives for 2008 - on the grounds that the Charlotte, North Carolina-based bank didn't say how much of the fine came from re-directed funds from the US government's Troubled Asset Relief Programme (TARP).

The SEC's allegations concern Bank of America misleading shareholders in the run-up to its $50-billion purchase of Merrill early in January 2009. In fact, BoA said in proxy materials to its shareholders describing the deal and soliciting their approval that it wouldn't pay year-end performance bonuses "or other discretionary compensation" to Merrill executives before the acquisition was completed.

In fact, BoA waited until after the deal was done before paying bonuses to Merrill executives - as, say US watchdogs, it had secretly agreed to do before seeming to mislead its shareholders.

On Wall Street, year-end bonuses often come in the new year; sometimes as late as March.

"On November 3, 2008, in a joint proxy statement soliciting votes from the shareholders of both companies, Bank of America represented that Merrill had agreed not to pay year-end performance bonuses or other discretionary incentive compensation to its executives prior to the closing of the merger without Bank of America's consent," the SEC said in a mid-January 2009 complaint.

"In fact, contrary to the representation in the merger agreement, BoA had agreed that Merrill could pay up to $5.8 billion - nearly 12 per cent of the total consideration to be exchanged in the merger - in discretionary year-end and other bonuses to Merrill executives for 2008," it continued.

In the event, BoA paid about $3.6 billion in 2008 bonuses to Merrill executives in January 2009.

Merrill lost $27.6 billion in 2008 - its worst year ever.

In proposing to settle the matter with a payment of $33 million, BoA emphasised that it was neither admitting or denying the SEC's allegations in the matter.

But US federal district court judge Jed Ratkoff refused to approve the settlement on the grounds that it "would leave uncertain the truth of the very serious allegations made in the complaint," and leave open the question that BoA, which has taken around $5 billion in TARP handouts - including $20 billion sent its way a few weeks after it paid the Merrill-exec bonuses - was attempting to use public money to settle the matter.