BofA, SEC defend Merrill bonus settlement
Bank of America Corp. and the Securities and Exchange Commission have become unlikely allies in pressing a federal judge to approve their hoped-for legal settlement over controversial bonuses at Merrill Lynch & Co.
Although their rationales differed, each implored U.S. District Judge Jed Rakoff on Monday to sign off on the $33-million accord.
“The proposed settlement is fair, reasonable, adequate and squarely in the public interest,” wrote David Rosenfeld, associate director of the SEC’s Manhattan office.
The filings represented the latest twist in a highly charged case that touches on the issue of unchecked Wall Street compensation as well as the credibility of the SEC.
The agency has alleged that Bank of America misled shareholders to believe that Merrill Lynch would not pay year-end 2008 bonuses. In fact, the SEC alleged, the bank had already approved $5.8 billion in bonuses at the brokerage, which it was in the process of acquiring, and Merrill eventually doled out $3.6 billion.
Although judges routinely sign off on such settlements, Rakoff has thus far refused to approve the deal, saying it leaves basic facts unanswered, such as whether BofA actually deceived shareholders.
Rakoff criticized the deal at a court hearing two weeks ago and ordered the two sides to submit additional details in Monday’s court filings.
In its filing, BofA stressed that it never misled shareholders about the bonuses and said it repeatedly made clear in earnings announcements and other documents that billions of dollars would be paid to Merrill employees.
The plan for the bonuses “was part of the ‘total mix’ of information available to shareholders,” BofA’s attorney, Lewis Liman, wrote. “Throughout 2008 -- both before and after the merger agreement was signed -- Merrill Lynch consistently disclosed its intention to pay incentive compensation in the range of multibillions of dollars.”
Among other things, BofA argued, numerous news reports predicted the size of Merrill’s planned bonuses, and none speculated the bonuses would not be paid. “The absence of any such media report speaks volumes,” Liman wrote.
The company said it wanted to resolve the case to end an “unnecessary distraction.”
Language that appeared to forbid the bonuses was standard legalese to prevent the “unilateral dissipation” of assets, BofA said. In actuality, it argued, shareholders were told that the merger pact had exceptions that allowed for the bonuses.
“Both Bank of America and Merrill Lynch repeatedly warned shareholders not to read the merger agreement or the proxy statement’s description thereof as a source of factual information,” Liman wrote.
Joseph Grundfest, a Stanford University law professor and former SEC commissioner, filed an affidavit arguing that BofA had a “powerful” case.
In its filing, the SEC walked a line, arguing that it had strong proof to back up its allegations against BofA and contending that the $33-million fine wasn’t a pittance.
The fine “strikes the right balance between the goals of deterrence and the need to avoid unnecessary harm to innocent shareholders,” Rosenfeld wrote.
The SEC said the document permitting Merrill to pay the bonuses was never made available to BofA shareholders.
Still, the SEC said, its investigation “did not support additional corporate charges against” the bank or any charges against its executives.
The SEC seems to have a strong case, but it risks undermining its effort to be seen as a forceful regulator by pressing for a settlement, said John Coffee, a securities law professor at Columbia University.
“The SEC has been accused over the years of having too much of a settlement culture,” Coffee said. “Here they are saying, ‘We want to have a new reputation as being tough, but we want to buy deterrence on the cheap.’ ”
The two sides will file responses to each other’s briefs next month, after which Rakoff may hold a hearing to assess the facts in the case.
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