Bank of America Corp. has agreed to pay $33 million to settle allegations that it misled shareholders by indicating that Merrill Lynch & Co. would not pay year-end bonuses -- when in fact the bank had already approved up to $5.8 billion in payments.
Federal regulators, who brought the suit against BofA, said the episode occurred as shareholders were considering the bank's proposed acquisition of Merrill Lynch last year.
"As Merrill was on the brink of bankruptcy and posting record losses, Bank of America agreed to allow Merrill to pay its executives billions of dollars in bonuses," David Rosenfeld of the Securities and Exchange Commission's New York office said Monday. "Shareholders were not told about this agreement at the time they voted on the merger."
Analysts said the agency's action reflected a new toughness on the part of the SEC, which is reacting to public outrage over disclosures that the Wall Street culture of high pay and rich bonuses -- especially at bailed-out institutions -- was seemingly unaffected by last year's financial crisis.
"This was partly a response to what is white-hot public anger," said John Coffee, a Columbia University law professor. "The public is angry about executive compensation at companies that taxpayers have bailed out, and when you have that anger, it could be as much the cause of a proceeding like this as the result."
Richard Bove, a banking analyst with Rochdale Securities, said the lawsuit was just one part of "a number of thrusts being made against the banking industry" by regulators and the Obama administration.
Bove isn't cheering the developments. In a note to investors entitled "The Government Is Out of Control," he said the new restrictions potentially "will cripple the competitiveness of large banks, forcing them to shrink."
BofA, which has received $45 billion in bailout funds from the government's Troubled Asset Relief Program, neither admitted nor denied wrongdoing in making the settlement.
"This is an important step forward for Bank of America and allows us to focus our energies on enhancing stockholder value by continuing to execute our strategies for the long-term success of our business," the bank said in a statement.
According to the SEC, BofA told shareholders in a proxy statement accompanying the acquisition that the bonuses wouldn't be paid without the bank's consent. But BofA failed to tell investors that it had weeks earlier granted Merrill permission to pay out up to $5.8 billion, the suit said.
Merrill finally paid $3.6 billion in bonuses, even though its $27.6-billion loss last year put it on bankruptcy's doorstep.
"The statements create the impression that Bank of America had not given its written consent to the payment of discretionary year-end bonuses at Merrill . . . when in fact by the time the proxy statement was prepared and distributed to shareholders, Bank of America had already given its written consent," the suit alleged.
The allotted $5.8 billion in bonuses amounted to nearly 12% of BofA's $50-billion purchase price.
The SEC suit is the latest pothole in Bank of America's star-crossed acquisition of Merrill. Previously, the bank has been at the center of a controversy over whether top government officials pushed it to withhold key information from shareholders last year to complete the Merrill deal and stave off even more dramatic problems in the financial system.
Critics, including some in Congress, have questioned whether Federal Reserve Chairman Ben S. Bernanke and former Treasury Secretary Henry M. Paulson forced BofA to follow through on the Merrill transaction, including potentially misleading shareholders about the depth of Merrill's impending fourth-quarter loss to prevent votes against the deal.
Given the concern about executive compensation, disclosure of the bonuses might have prompted investors to shoot down the deal, said banking analyst Nancy Bush of NAB Research in Annandale, N.J. "People were up in arms about what was going on," Bush said.
Also Monday, Bank of America Chief Executive Ken Lewis announced that he was shaking up senior management in a series of changes that included the replacement of Liam McGee as head of consumer banking by Brian Moynihan, the current head of investment banking. Tom Montag succeeded Moynihan. McGee is leaving to pursue a goal of running a company, the bank said.
Lewis also hired former Citigroup Inc. executive Sallie Krawcheck, a veteran of a variety of senior financial services positions, to run the bank's global wealth and investment management unit. She will be a member of the executive management team.
"These changes also position a number of senior executives to compete to succeed me at the appropriate time," said Lewis, 62.