Updated to reflect news of Rakoff's approval of the settlement.
NEW YORK (
) -- A federal judge ruled Monday to accept a settlement between
Bank of America
Securities and Exchange Commission
in a move that should allow the company to start putting the Merrill Lynch mess behind it.
Judge Jed Rakoff approved the $150 million settlement between the parties, but did call for a few revisions to the pact. In the
released by the court, Rakoff said he was "reluctantly" giving the okay, and still found fault with the monetary penalty, noting the settlement now resolves two separate lawsuits -- one related to bonuses paid as well as one related to the disclosure of the extent of Merrill losses.
"The part of the proposed settlement that presents the greatest difficulty is, however, the penalty package, which essentially consists of a $150 million fine." he writes, adding later that the "amount of the fine appears paltry" given that the Merrill merger "could have been a Bank-destroying disaster if the U.S. taxpayer had not saved the day."
The case stems from attempts to settle questions about management's handling of disclosures ahead of Bank of America's acquisition of Merrill Lynch. The SEC didn't find grounds to charge individuals or the bank with anything improper or illegal, but the commission does believe that Bank of America could have done a better job of telling shareholders what was happening behind the scenes.
The regulator initially brought a $33 million settlement to
Rakoff's desk last summer to resolve a lawsuit related to the bonuses paid to Merrill employees. But given the public mood and
shareholders' anger, the New York federal judge posed tough questions to the SEC, pointed out logical flaws in both sides' arguments, and sent the settlement back for a revision.
It was an embarrassing setback for the SEC, which has faced harsh criticism for years for being a toothless regulator, and one that missed blaring warning signs about the misdeeds of Ponzi schemers like Bernard Madoff. The agency took note, poring over reams of Bank of America documents and evidence for months.
Still, it was unable to come up with evidence of wrongdoing by either the bank or individuals, even as it uncovered more precise details of how the deal was sealed, who was responsible for certain decisions, and why those decisions were made.
The SEC ultimately came back to Rakoff with the revised settlement amount of $150 million, which is to be distributed to shareholders. As part of the settlement, Bank of America also agreed to review its disclosure practices, strengthen corporate governance, and engage outside parties as a watchdog to ensure that shareholders are better protected.
Complications arose, however, when just as the SEC presented its revisions, New York Attorney General Andrew Cuomo used the same set of facts to come up with a different conclusion. He charged Bank of America and two one-time top executives with fraud
on the same day that the SEC unveiled its newly proposed settlement terms.
Cuomo asserts that management manipulated facts to get the best of both sides. He accuses the bank, former CEO Ken Lewis and former CFO Joe Price, who's still an executive at B of A, of using Merrill's losses as an excuse to get additional taxpayer funds, while allowing extreme bonuses to be paid to Merrill employees, and purposefully hiding the same facts from shareholders to get them to approve the deal.
Cuomo has also suggested that a former top lawyer at Bank of America,
Timothy Mayopoulos, was dismissed because he was questioning those tactics. However, the SEC found that Mayopoulos was fired to make room for now-CEO Brian Moynihan, who was then considering leaving the bank because Lewis had planned to move him into a role he didn't want. The SEC says e-mails and other evidence from Bank of America executives support this fact.
Rakoff spends a good part of his statement discussing the differences between the findings of the SEC and Cuomo but notes that "the Court here is not making any determination as to which of the two competing versions of the events is the correct one," rather its role is just to determine that the conclusion being drawn by the SEC is a "reasonable conclusion, supported by substantial evidence, that a reasonable regulator could draw."
Among the revisions that Rakoff is insisting upon for the revised version of the settlement that the parties must submit to the court by Thursday is that the independent auditor and disclosure counsel chosen by Bank of America be acceptable to the SEC. The original settlement had said the positions would be filled "in consultation" with the SEC. The settlement will also call for the Court to have the final say if the SEC and B of A can't agree. B of A had agreed to this condition already in the subsequent back-and-forth that followed the settlement's original submission.
Rakoff had also wanted the choice of the required compensation consultant to be made jointly by B of A's compensation committee, the SEC and the Court, but he conceded that the company's objection to this wasn't a "dealbreaker."
Bank of America shares rose 1.4% to $16.11 in recent trades. Volume of 70 million was roughly one third of the issue's trailing three-month daily average of 217 million.
-- Written by Lauren Tara LaCapra in New York