Bank of America Corp.'s deal to pay $33 million to settle accusations that it misled shareholders about executive bonuses hit a roadblock Monday -- U.S. District Judge Jed Rakoff.
The bank agreed last week to pay the money to settle a Securities and Exchange Commission lawsuit alleging that it led shareholders to believe that Merrill Lynch & Co. would not pay year-end bonuses.
In fact, the bank had already approved $5.8 billion in bonuses at Merrill, which it was in the process of acquiring at the time.
Rakoff refused to approve the settlement, however. During a 90-minute court hearing, he assailed the SEC for failing to determine whether the bank intentionally set out to deceive shareholders.
"Don't I need to know what the truth is before I can make a determination?" Rakoff asked, adding that he wanted "the truth, not the spin."
As for the $33 million that BofA would pay to resolve the case, the judge suggested that could be inadequate, saying it would not be "remotely reasonable" if it's shown that BofA purposely misled shareholders.
BofA's attorney, Lewis Liman, said the bank's disclosure was adequate because the proxy statement instructed investors to read the official merger agreement, where details of the bonuses were spelled out.
But Rakoff scoffed at that, saying the proxy was dense enough without "opthalmologically challenging" small-print disclosures pointing to other documents.
Rakoff's comments stood out, given that judges routinely approve SEC settlements.
"Normally they read the papers and it takes an hour or two and you get your final judgment signed," said Therese Pritchard, a former SEC attorney who is now a partner at Bryan Cave in Washington.
"Certainly for a judge to publicly question the support for a settlement is extremely rare," Pritchard said.
Rakoff told the two sides to submit additional information in two weeks and said he wouldn't rule on the settlement until September at the earliest.
In its case, the SEC alleged that BofA told shareholders in a proxy statement during the Merrill acquisition that bonuses wouldn't be paid without BofA's consent.
But BofA made no mention of the fact that, weeks earlier, it had granted Merrill permission to pay out up to $5.8 billion, according to the SEC.
Merrill eventually handed out $3.6 billion in bonuses, even though its $27.6-billion loss last year forced the once-proud brokerage giant into BofA's arms.
BofA shareholders approved the merger late last year and it closed in early January.
"Do Wall Street employees expect to be paid big bonuses in years when their companies lose $27 billion?" Rakoff asked during the hearing.
Rakoff wondered whether the $33 million would come from taxpayers, given that the government has extended $45 billion to help the bank get through the financial crisis, including $20 billion specifically to offset Merrill's losses.
"Is there not something strangely askew in a fine of $33 million?" Rakoff said.
David Rosenfeld, associate director of the SEC's New York office, said the payment would come from BofA's recent earnings.
The judge also was upset that the SEC didn't identify the bank executives or lawyers who decided to withhold the bonus information from shareholders, asking whether "some sort of ghost" had made the decision.
Rakoff also tore into BofA for not revealing the bonuses, given that compensation is a hot-button issue.
"It wasn't like something not in the public eye or an obscure issue," Rakoff said.
BofA agreed to the settlement, but it neither admitted to nor denied wrongdoing.
Liman argued that the bank's proxy made it clear that routine "incentive" bonuses would be paid to retain valuable employees.
Rakoff wasn't buying it.
"How many brokerage firms -- assuming there were any left -- were hiring at this time?" the judge asked.
Liman refused to comment after the hearing.
Rosenfeld also refused to comment but issued a statement later saying that the SEC looks forward "to further presenting the facts of our case and providing the additional information the judge is seeking."