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SEC showed leniency to bailed-out Bank of America, watchdog report says

By Zachary A. Goldfarb
Washington Post Staff Writer
Tuesday, November 30, 2010; 10:34 PM

The Securities and Exchange Commission showed leniency toward Bank of America in penalizing the firm for securities law violations last year because the financially weakened bank was on taxpayer-backed life support, according to a new watchdog report.

The agency agreed to a settlement that was "favorable" to the bank "because of the nation's perilous economic situation at the time" and the fact that it had received billions of dollars in taxpayer aid, according to the report by the SEC's inspector general. Specifically, during settlement negotiations, Bank of America won relief from sanctions that could have hurt its investment banking business.

The inspector general, H. David Kotz, did not find fault with the decision but suggested that the SEC spell out its procedures for handling such cases more clearly. Agency spokesman John Nester said, "We value the report's insights and look forward to addressing its recommendations."

Kotz opened the investigation based on a request from Rep. Elijah E. Cummings (D-Md.). Cummings made the request based on an August 2009 article in The Washington Post raising these issues, according to the inspector general.

The article examined how the SEC was confronting the challenge of handing out punishments against major banks for wrongdoing at the same time that other regulators and government officials were trying to ensure these firms remained on stable footing.

In particular, the article looked at issues raised by Bank of America's fall 2008 acquisition of Merrill Lynch, a deal that was the subject of the SEC's investigation and eventual settlement.

After initially agreeing to the purchase, Bank of America had second thoughts because of mounting losses at Merrill. But the Federal Reserve and Treasury Department pressured Bank of America to follow through on the deal, concerned that a change of course could worsen the escalating financial crisis.

In August 2009, the SEC accused Bank of America of concealing nearly $6 billion in bonuses paid to Merrill Lynch employees before the acquisition was completed. The bank agreed to pay $33 million to settle the case.

But a judge refused to offer the court approval necessary to finalize the settlement. The judge, Jed S. Rakoff of the Southern District of New York, questioned whether the penalty was sufficient and whether the SEC had investigated thoroughly enough to settle.

Months later, the SEC and Bank of America agreed to a modified settlement that also charged the bank with failing to disclose mounting losses at Merrill Lynch. Bank of America agreed to pay $150 million and a host of other sanctions. This settlement won Rakoff's approval.

The inspector general found that the SEC showed leniency in the first settlement. He did not find that Bank of America's status as a bailed-out bank affected the settlement's price tag. Rather, he found that the SEC exempted Bank of America from other sanctions.

Like many of its competitors, Bank of America has long enjoyed a special status with the SEC that allows it to issue securities more easily.

Customarily, a firm that agrees to settle violations of securities law related to disclosures would lose this special status, thereby penalizing the firm with a lengthier and costlier process for issuing securities.

In settlement discussions with the SEC, Bank of America asked to retain that special status. The SEC, at first, declined, insisting that firms that violate the disclosure requirements of securities laws must suffer the consequences of those actions.

The agency reversed course in a last-minute meeting with Bank of America before the full commission voted to approve the settlement.

"In this meeting, BofA argued that the dire state of the financial markets made it critical that it be able to raise money quickly" by issuing securities, according to the inspector general's report.

SEC officials decided to allow the bank to retain the special status because it had received taxpayer bailouts and "it would not be in the interest of the market or investors to prevent them from getting to the market," according to the report.

Separately, the inspector general found that the SEC looked into the roles played by the Fed and Treasury in Bank of America's decisions but that they weren't relevant to the allegations of wrongdoing made against the bank.

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