By Zachary A. Goldfarb
Washington Post Staff Writer
Tuesday, August 4, 2009
Bank of America agreed to pay $33 million on Monday to settle federal charges that it hid from investors plans to pay billions of dollars in bonuses to employees of Merrill Lynch, the troubled investment bank it agreed to buy last fall.
The Securities and Exchange Commission accused the firm of misleading shareholders when the bank asked them to approve the deal, which was ultimately concluded under intense federal pressure as Merrill Lynch teetered on the verge of collapse.
The SEC alleged that Bank of America told investors that the bonuses would not be paid without its consent. In fact, Bank of America had secretly authorized $5.8 billion in bonuses to be paid by Merrill Lynch, the SEC said.
Bank of America did not admit to or deny the allegations in agreeing to settle the case, one of the highest profile to come out of the financial crisis so far.
"As Merrill was on the brink of bankruptcy and posting record losses, Bank of America agreed to allow Merrill to pay its executives billions of dollars in bonuses," said David Rosenfeld, associate director of the SEC's New York office. "Shareholders were not told about this agreement at the time they voted on the merger."
Bank of America spokesman Scott Silvestri said the company considered the settlement a "constructive conclusion" to the dispute over the Merrill bonuses. "This is an important step forward for Bank of America and allows us to focus our energies on enhancing stockholder value by continuing to execute our strategies for the long-term success of our business," he said.
In recent months, the financial crisis has moved into a new phase of accountability as federal regulators and law enforcement officials have ramped up efforts to punish firms and executives that contributed to the meltdown. The SEC and Department of Justice have dozens of ongoing investigations into companies at the heart of the crisis, including Fannie Mae, Freddie Mac, Citigroup and American International Group.
The case against Bank of America is the first one brought by the federal government against a financial firm closely involved in the crisis. The SEC has already filed suit against individual executives accused of wrongdoing in connection with the meltdown.
Bank of America's acquisition of Merrill Lynch has come under review by the SEC, Department of Justice, New York attorney general and congressional investigators. The deal, completed in January, has attracted such scrutiny in part because federal officials played a central role in pushing the bank to buy Merrill Lynch and offered tens of billions in bailout dollars to support the purchase.
The settlement drew some criticism Monday, both because the fine was not larger and because no executive was charged with wrongdoing.
"It is always people, not the shell legal entity, that engage in illegal behavior. And that's who you want to hold accountable," said Lynn Turner, a former SEC chief accountant. "Charging the car does nothing to prevent the driver from going out and driving recklessly again."
Rep. Dennis J. Kucinich (D-Ohio), who oversees a House Oversight and Government Reform subcommittee that has been probing the deal, blasted the settlement amount. "Apparently corporate crime in America pays, and for those who approved and received bonuses it pays handsomely," he said in a statement.
SEC officials said the penalty was the largest ever imposed by the agency for a violation of the requirement that companies disclose relevant information in connection with shareholder votes.
Bank of America agreed to buy Merrill Lynch for $50 billion in a deal that frightened officials arranged in a single weekend in September. At the time, the prospect of several major corporate failures, including that of Merrill Lynch, was threatening to bring down the global financial system. Bank of America later considered pulling out of the deal after discovering the depth of the losses at the investment bank. The federal government provided $45 billion in emergency aid from the Troubled Assets Relief Program, not only to help Bank of America absorb Merrill but also to keep Bank of America itself afloat.
In a Nov. 3 regulatory filing ahead of a shareholder vote on the deal, Bank of America described the terms of the acquisition to investors. While Bank of America said Merrill Lynch would not pay any bonuses without permission, these had already been promised, the SEC said, and Merrill Lynch paid $3.6 billion in bonuses to employees after the merger was approved.
Lawmakers have questioned whether Bank of America chief executive Kenneth D. Lewis, as well as officials at the Federal Reserve and Treasury Department, concealed important information from investors as they worked to close the Merrill Lynch deal. Lewis has said he acted properly at all times.
Lewis has faced increasing pressure to shake up Bank of America's top ranks. In April, he gave up the title of chairman, and many of the company's directors have resigned. In addition, the bank on Monday shuffled its senior officials, putting several executives in position to replace Lewis and fueling speculation about who will succeed him.