Judge Refuses to Approve Bank of America's $33 Million Settlement With SEC

By Zachary A. Goldfarb and Tomoeh Murakami Tse
Washington Post Staff Writers
Tuesday, August 11, 2009

NEW YORK, Aug. 10 -- A federal judge refused on Monday to sign off on a $33 million settlement between Bank of America and the Securities and Exchange Commission, demanding to know why the agency accepted such a small penalty.

Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York also asked for the names of the executives allegedly involved in concealing from investors plans to pay billions of dollars in bonuses at Merrill Lynch, the troubled firm Bank of America bought during the financial crisis.

If Bank of America "misled the shareholders, as you assert about a multi-billion dollar matter, isn't there something strangely askew in a fine of $33 million?" Rakoff asked SEC lawyers. "[I]t is very difficult for me to see how the proposed settlement . . . is remotely reasonable."

Bank of America's lawyers tried to assuage the judge's concerns that the bank was planning to pay the settlement out of funds it received from taxpayers as part of the federal bailout of the financial sector, insisting the money would come from elsewhere. However, in response to a separate earlier inquiry, the bank had said it could not "segregate" government aid for one purpose or another.

Rakoff's refusal to endorse the settlement is a setback for the SEC in its attempt to bring high-profile cases linked to the financial crisis.

It also puts the nation's top Wall Street cop in an awkward spot: on the same side of the bank that it is taking action against. Without the judge's consent, the settlement is not final. Rakoff gave the SEC and Bank of America until Aug. 24 to provide more details about the deal.

During Monday's hearing, Rakoff pressed lawyers on who decided what to reveal to shareholders in a November proxy statement, and he asked whether Bank of America chief executive Kenneth D. Lewis and former Merrill Lynch chief executive John Thain might be involved. "Was it some sort of ghost?" Rakoff asked. "Who were the people? . . . If you are correct that this proxy statement was materially misleading, then at a minimum Mr. Thain and Mr. Lewis would seem to be responsible for that, yes?"

An SEC lawyer, Maureen Lewis, said the executives relied on their lawyers in signing the proxy statements. SEC lawyers added that various factors go into determining a settlement, including precedent, of which the case has few. They noted that another bank, Wachovia, had agreed to pay $37 million to settle allegations that it failed to disclose $500 million in bonuses

Bank of America said no one at the firm did anything intentionally wrong and it continues to believe the settlement, which does not require the bank to admit or deny wrongdoing, is "constructive."

Bank of America's claim that money for the settlement wouldn't come from funds it has received as part of the Troubled Assets Relief Program appeared to be at odds with what the bank had told the Treasury Department's special inspector general about its ability to track funds.

At the time, the inspector general had asked banks receiving taxpayer aid for detailed information on how they were using the assistance, in particular whether they were using it to make loans. In a May 11 response, Bank of America said it did not separate out the bailout funds it received on its balance sheet, according to a recent report by the special inspector general.

"Since all TARP investment funds are part of our operating capital, they cannot effectively be segregated," Bank of America wrote to the special inspector general, according to the report.

Bank of America has received a total of $45 billion from the government, including investments made to ensure the bank's stability and to help it absorb Merrill Lynch. A Bank of America spokesman declined to comment on the possible contradiction.

Separately, Bank of America agreed Monday to pay $55 million to settle a class-action lawsuit by employees of Countywide Financial, which it bought last fall. The employees accused Countrywide of concealing the company's deteriorating health and making them lose much of their retirement funds. A judge must rule on the settlement, which doesn't involve the SEC, later this month.

Goldfarb reported from Washington.

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