A federal judge on Monday rejected a $33 million settlement between the Securities and Exchange Commission and Bank of America, saying the SEC's accusations of inadequate disclosure by the bank over bonuses paid at Merrill Lynch must now go to trial.
Separately, New York Attorney General Andrew Cuomo's office is preparing to file charges within the next couple of weeks against several high-ranking executives at Charlotte-based Bank of America, claiming they failed to disclose details about the bank's acquisition of Merrill Lynch, according to a person familiar with the investigation.
The ruling in the SEC case comes one month after the agency and Bank of America, South Carolina's second-largest bank based on deposits, thought they had put a thorny issue behind them, and leaves the SEC with the task of mounting a case against BofA over one of the most sensitive issues of the financial crisis - executive pay on Wall Street.
The SEC announced last month that it had settled its civil charges against BofA, which agreed to buy the New York investment bank last year, without the bank admitting or denying guilt in the case. BofA has said it didn't violate disclosure rules.
U.S. District Judge Jed Rakoff held up his approval of the settlement, however, and ordered the SEC last month to explain why it didn't pursue charges against specific executives at Bank of America over the accusations.
Rakoff, in his ruling, found that the proposed settlement "suggests a rather cynical relationship between the parties: the SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger, the bank's management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but also of the truth."
Cuomo's office is likely to file civil charges against the executives over their role in failing to alert shareholders to mounting losses and accelerated bonus payments at Merrill, said the person, who requested anonymity because no charges have been filed.
The AG's office has also questioned whether Bank of America failed to tell shareholders about its consideration of backing out of the deal and mounting write-downs at one of Merrill's mortgage lending subsidiaries.
Both the attorney general's office and Rakoff have questioned whether the bank knowingly hid details about the acquisition from shareholders ahead of a vote to approve the deal.
After receiving additional statements from the SEC and BofA last week, Rakoff ruled Monday that the proposed $33 million settlement "cannot remotely be called fair," and ordered that the case go to trial beginning Feb. 1.
Bank of America agreed to acquire Merrill Lynch in a hurried deal exactly one year ago today, just as Lehman Brothers was preparing to file for bankruptcy. It was later revealed that Merrill, with the knowledge of Bank of America executives, accelerated $3.6 billion in bonus payments before the deal closed on Jan. 1.
Merrill wound up paying the bonuses for 2008 despite losing $27.6 billion that year, a record for the firm. Those losses affected the bottom line at Bank of America, one of the largest recipients of U.S. government bailout funds.
Bank of America did not provide immediate comment on the ruling.
"As we said in our court filings, we believe the proposed settlement properly balanced all of the relevant considerations," SEC spokesman John Nester said in a statement. "We will carefully review the court's most recent order."
"BofA is in serious, serious trouble now," said Anthony Sabino, professor of law and business at St. John's University in New York, saying the bank is at war on two fronts. "One, Judge Rakoff, by refusing to countenance the settlement, is forcing the SEC to go back and demand more details and more money. The other battleground is with New York Attorney General Andrew Cuomo."