By Zachary A. Goldfarb
Washington Post Staff Writer
Wednesday, August 26, 2009
A federal judge said Tuesday that he was not satisfied by the Securities and Exchange Commission's explanation for why it agreed to accept a $33 million payment from Bank of America to settle allegations that the bank misled investors, calling the agency's justification "puzzling" and "at war with common sense."
The SEC and Bank of America have implored Judge Jed S. Rakoff of the Southern District of New York to sign off on the settlement. Earlier this month, the SEC charged that Bank of America hid from shareholders plans to pay billions of dollars in bonuses to employees of Merrill Lynch, the troubled Wall Street firm it bought during the financial crisis.
But Rakoff has refused to endorse the settlement. He has demanded to know why the SEC filed a case against the company and not the executives who made the decisions about disclosures of bonuses. He also wants to know how the SEC settled on the size of the penalty.
Judges often sign off on settlements without delay, but Rakoff's persistent questioning of the SEC and Bank of America is providing a window into a controversial chapter in the financial crisis. The bonuses paid by Merrill Lynch, before it was bought by Bank of America, one of the top recipients of federal aid, have attracted intense scrutiny not only from the SEC but also from Congress and the New York attorney general. Likewise, the judge's inquiry is shedding light on the SEC's internal approach to the case, one of the most high profile linked to the financial crisis.
In a court filing Monday, the SEC said Bank of America executives relied on advice from outside counsel, Wachtell, Lipton, Rosen & Katz. The agency said it had no evidence that the executives sought to mislead shareholders and could not investigate whether they did so without Bank of America waiving its attorney-client privilege, which the bank did not do.
"If the SEC is right in this assertion, it would seem that all a corporate officer who has produced a false proxy statement need offer by way of defense is that he or she relied on counsel, and, if the company does not waive the privilege, the assertion will never be tested, and the culpability of both the corporate officer and the company counsel will remain beyond scrutiny," Rakoff wrote Tuesday.
Rakoff also raised the possibility that the lawyers could be held responsible. The settlement "leaves open the question of whether, if it was actually the lawyers who made the decisions that resulted in a false proxy statement, they should be held legally responsible," he wrote.
Rakoff gave Bank of America and the SEC until Sept. 9 to provide more information on how they came to the settlement. He also sharply questioned Bank of America's argument that it did nothing wrong, but simply settled with the SEC to avoid the hassle of "a protracted dispute with one of its principal regulators," as it wrote in a brief Monday.
"Whatever this chain of vague expressions may mean, if it is intended to suggest that Bank of America settled this case to curry favor with the SEC or to avoid retaliation by the SEC, the court needs to know the specifics," Rakoff wrote.
Rakoff also expressed concern that the $33 million penalty would be paid for, at least in part, by taxpayers. He said the penalty "will fall directly on the shareholders of Bank of America (and arguably indirectly on U.S. taxpayers)."
An SEC spokesman said the agency would provide additional information to the court. A Bank of America spokesman said the disclosure of bonuses wouldn't have had an effect on shareholders who voted on the deal. "We presented to shareholders the strategic logic of the Bank of America and Merrill Lynch combination," he said.
In its complaint earlier this month, the SEC said that the November 2008 proxy statement requesting shareholder approval for the Bank of America-Merrill Lynch deal told investors that the bonuses would not be paid without Bank of America's consent.
In fact, the SEC said, Bank of America had secretly authorized up to $5.8 billion in bonuses to be paid by Merrill Lynch.
Bank of America, at the time, did not admit or deny wrongdoing.