Source of Money Hangs Up Bank of America Settlement

The SEC is unsure whether a court's concern about the Bank of America settlement will disrupt the case.
The SEC is unsure whether a court's concern about the Bank of America settlement will disrupt the case. (By Matt Rourke -- Associated Press)
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By Zachary A. Goldfarb
Washington Post Staff Writer
Friday, August 7, 2009

The decision by a federal judge this week to withhold approval for Bank of America's $33 million settlement with the Securities and Exchange Commission has left the high-profile case up in the air while he examines whether the bank would pay the penalty using taxpayer dollars received under the federal bailout of financial firms.

Earlier this week, Bank of America agreed to pay the fine to settle charges that it hid from shareholders plans to pay billions of dollars in bonuses to Merrill Lynch, the troubled investment bank it bought earlier this year. Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York declined Wednesday to endorse the settlement. He scheduled a hearing for Monday afternoon to discuss the issue.

Rakoff said the settlement agreement had failed to clarify several aspects of the case.

"Despite the public importance of this case, the proposed Consent Judgment would leave uncertain the truth of the very serious allegations made in the Complaint," Rakoff wrote in an order. He added, "The proposed Consent Judgment in no way specifies the basis for the $33 million figure or whether any of this money is derived directly or indirectly from the $20 billion in public funds previously advanced to Bank of America as part of its 'bail out.' "

A Bank of America spokesman said it was virtually impossible that Bank of America would use money from the government to pay the settlement. The bank earned $7.5 billion in profit this year.

"We cannot envision any scenario under which [bailout] money would be used to fund the settlement," said Scott Silvestri, a Bank of America spokesman.

SEC officials said they took into account Bank of America's status as a company that has received public money in devising the settlement, but that these considerations did not affect the outcome of the case. Officials said they were not sure if the judge's concerns were merely a procedural roadblock or something that could significantly disrupt the case.

The size of the penalty was determined in negotiations with Bank of America. The penalty was for the lowest tier of offenses -- those involving a violation of securities laws but not fraud, which is a more serious crime, according to people familiar with the matter.

Bank of America's purchase of Merrill Lynch, which was completed under heavy pressure from senior officials at the Treasury and Federal Reserve, has drawn legal and political scrutiny from Capitol Hill and regulators.

Lawmakers have questioned whether Bank of America executives and federal officials worked to conceal important details of the deal for regulators and the public. These include the bonuses and growing losses at Merrill Lynch.

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