Wednesday, September 23, 2009

Securities: Federal Court Rejects Proposed Settlement between SEC and Bank of America

A federal district court in Manhattan has refused to accept a proposed consent judgment between the Securities and Exchange Commission and the Bank of America. The matter arose from BofA'a $50 billion acquisition of Merrill Lynch last year. The SEC alleged that before the closing of the acquisition BofA in an effort to seek authorization for the acquisition sent a proxy statement to is shareholders containing materially false information. The complaint alleged that the proxy statement advised BofA shareholder falsely that ML had agreed not to pay year-end performance bonuses to its executives before the closing without first obtaining BofA's consent. The SEC alleged that at the time of the proxy statement, BofA had already agreed to ML paying up to $5.8 billion (or more than 10% of the acquisition price) in bonuses. Simultaneously, with the filing of the complaint, the parties filed a proposed settlement in which Bank of America would pay $33 million to the SEC without admitting or denying the allegations. It was this proposed consent judgment that the court rejected.

District Judge Jed Rakoff issued a sharply worded order denying the parties' request to enter the consent judgment. In essence, the court suggested that the consent was a sham agreement between the parties that would allow the SEC "to claim that it is exposing wrongdoing on the part of [BofA] in a high-profile merger" and would allow BofA's management "to claim that they have been coerced into an onerous settlement by overzealous regulators." Moreover, the court said that "all this is done at the expense, not only of the shareholders, but also of the truth."

The court characterized the proposed consent settlement as unfair, unreasonable, and inadequate. It pointed to the preposterous result that the settlement would produce. The settlement proposed that management of BofA, after hiding from shareholders that as much as $5.8 billion of the shareholders' money would be given out as bonuses to ML executives, "who had run the company nearly into bankruptcy," would settle the legal ramifications "of their lying by paying the SEC $33 million more of their shareholders' money.

The SEC had argued to the court that it could not charge BofA managers because lawyers retained by BofA and ML had made the relevant disclosure decisions. The court responded to the argument by asking rhetorically why the SEC had not charged these lawyers. Moreover, the court also asked why the culpability of outside counsel would "justify imposing penalties on the victims of the lie, the [BofA] shareholders[.]"

For its part BofA had argued that, upon a very close reading, the proxy statement was neither false nor misleading. The court pointed out that this argument rests on a schedule that did not appear in or with the proxy statement. Moreover, the order takes the bank to task for its failure to provide the court with the facts concerning how the proxy statement was prepared and who made the decisions concerning its content about the bonuses. The court had requested this information earlier in the litigation. The court also addressed the bank's claim that it was innocent of lying in the proxy statement. The order asked why the bank was prepared to pay $33 million to settle the case if it was innocent of wrongful conduct.

The bank had suggested in a footnote to one of its filings that its decision to settle was simply a business decision between litigating or settling case. The court responded with skepticism that litigating a straight forward proxy statement case "would cost anything like $33 million." Moreover, the court pointed out that the bank's decision to settle was made by the same managers who were accused of having lied in the first place.

The court has set a trial date of February 1, 2010. For its part the SEC can appeal, dismiss the complaint, or prepare for trial. At this stage it appears most likely that the case will go to trial at which time the facts about how and who prepared the proxy statements will finally become public.

For a further discussion of the court's order and how the decision impacts public policy, please see The New York Times, "Judge Rejects Settlement Over Merrill Bonuses," September 15, 2009,

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