Judge criticizes, but approves, settlement with Bank of America

By Zachary A. Goldfarb
Tuesday, February 23, 2010

A federal judge on Monday approved a $150 million settlement between the Securities and Exchange Commission and Bank of America on narrow legal grounds, but derided as "half-baked justice" the regulator's decision to settle with the bank over allegations it lied to investors.

After rejecting a smaller settlement last year, U.S. District Judge Jed S. Rakoff of the Southern District of New York said he considered the new agreement "inadequate and misguided" because its penalties are "very modest." Bank of America must pay the fine and agree to other changes designed to improve oversight of the company by its board of directors.

Nevertheless, the judge said that under the law, it is still largely the prerogative of the SEC, as the nation's chief enforcer of securities law, to determine the proper regulatory sanctions to bring in the case. The new settlement, he said, is an improvement on last year's $33 million proposal and is "better than nothing."

The case arose out of Bank of America's purchase of Wall Street investment firm Merrill Lynch in the fall of 2008. The SEC alleged that in seeking shareholders' approval for the deal, Bank of America failed to tell investors about mounting financial losses at Merrill Lynch, as well as plans to pay billions of dollars in bonuses to the firm's employees.

Rakoff's grudging approval of the settlement underscores lingering doubt over whether the SEC went as far as it could in trying to determine whether individual executives should be held accountable for the bank's alleged wrongdoing.

The SEC maintained that the bank erred in not making the proper disclosures, and that executives and their counsel did not conspire to deceive investors. This view will be tested in coming months as New York Attorney General Andrew Cuomo presses his own case, filed 2 1/2 weeks ago, against Bank of America.

Going beyond what the SEC has alleged, Cuomo filed fraud charges against the bank and two of its former top executives, chief executive Kenneth D. Lewis and chief financial officer Joe Price, saying the bank and the executives worked to conceal information from shareholders. The bank and its former executives are contesting the charges.

Even though the SEC's account of events and Cuomo's differ in key ways, Rakoff said it is not clear whose version of the truth was accurate, based on the evidence the agency and the attorney general provided to the court.

For instance, Cuomo has alleged that Bank of America fired in December 2008 its top lawyer, Timothy J. Mayopoulos, because of concerns he "knew too much" about Merrill Lynch's losses. The bank says Mayopoulos was removed to make room for Brian Moynihan, who has since become the bank's chief executive. The SEC concurs with the bank's account.

Rakoff said none of the evidence "directly contradicts" the bank's view in this matter, one of the reasons he cited in approving the settlement despite the more serious allegations made by Cuomo.

The settlement is expected to be finalized on Thursday after the SEC and Bank of America complete a little more legal paperwork. But it has been a tortuous path to this point for the bank and the agency.

In August, the SEC filed a 13-page complaint against Bank of America, alleging violations only related to disclosure of bonuses, and the bank immediately agreed to a $33 million settlement. By the luck of the draw, the case ended up in the hands of Rakoff, who has a reputation for refusing to rubber-stamp regulatory settlements.

Rakoff ridiculed the proposed deal, saying it left unanswered far too many questions and was a convenient way for both the regulator and the bank to sweep details of this key episode in the history of the financial crisis under the rug. He ordered the case to trial.

That was a setback for the SEC, which had been trying to show it could be an aggressive Wall Street regulator after years in which it was perceived as taking a light touch.

Then the SEC added new charges and announced a new settlement with Bank of America, increasing the fine and requiring that the bank agree to changes to how it runs its business. For example, the bank will have to hire independent consultants to audit compensation and disclosure practices.

It also furnished the court with voluminous details of its investigation into the bank, providing more details of how it arrived at its conclusion.

Rakoff called measures to improve oversight of the company by its board of directors "helpful," and said they might help "to render less likely the kind of piecemeal and mincing approach to public disclosure."

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