Deal on Merrill bonuses spurned

In a rare move, a federal judge threw out a deal in which Bank of America Corp. would have paid $33 million to settle charges that it misled shareholders about $3.6 billion in bonuses being paid to Merrill Lynch & Co. executives, contending that the punishment was too light.

U.S. District Judge Jed Rakoff in New York also lashed out at federal regulators, saying they didn’t dig deeply enough to determine whether Bank of America executives intentionally set out to deceive shareholders about plans to pay bonuses to employees of Merrill Lynch last year, when the bank was acquiring the Wall Street firm.

Rakoff’s ruling Monday was another embarrassment for the Securities and Exchange Commission, which has come under fire for failing to heed repeated warnings about Bernard Madoff’s Ponzi scheme, and could put more pressure on the agency to toughen its stance on corporate misconduct.


By casting a harsh spotlight on the SEC’s willingness to settle cases without proving allegations in court or forcing companies to admit wrongdoing, the ruling could embolden other judges to view such settlements critically, legal experts said.

“The SEC can no longer count that other federal judges will be rubber stamps,” said John Coffee, a Columbia University law professor. “The judges are going to take a closer look.”

The judge issued his decision as President Obama marked the one-year anniversary of the collapse of Lehman Bros. by speaking in New York to push for his financial regulatory overhaul, including measures to rein in executive pay.

“We will not go back to the days of reckless behavior and unchecked excess that was at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses,” Obama said in remarks at historic Federal Hall across from the New York Stock Exchange.

The government alleged that Bank of America deceived shareholders into believing that Merrill Lynch, staggering from financial losses, would not pay year-end 2008 bonuses. In fact, the SEC says, the bank had already approved $5.8 billion in Merrill bonuses, of which the brokerage eventually handed out $3.6 billion.

In his 12-page ruling, Rakoff criticized the $33-million payment, saying that if Bank of America intentionally deceived shareholders, "$33 million is a trivial penalty for a false statement that materially infected a multibillion-dollar merger.”

He also questioned why Bank of America shareholders should foot the bill for misdeeds approved by executives. Regulators say shareholders weren’t aware of the bonuses before voting to approve the deal to acquire Merrill late last year, according to regulators.

“The notion that Bank of America shareholders, having been lied to blatantly in connection with the multibillion-dollar purchase of a huge, nearly bankrupt company, need to lose another $33 million of their money . . . is absurd,” Rakoff wrote.

“The SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger,” the judge wrote. “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.”

Rakoff had signaled in August that he was unhappy with the settlement. In formally rejecting it Monday, the judge ordered that a trial in the civil case be held in February. The government and the bank issued statements saying they were contemplating their next moves.

“We believe the proposed settlement properly balanced all of the relevant considerations,” the SEC said. “We will carefully review the court’s most recent order.”

Bank of America repeated its position that “proper disclosure was made to shareholders about Merrill bonuses. We are prepared to prove that through litigation. We will consider all our legal options.”

Before taking the case to trial, the government could propose another settlement with harsher penalties. It also could drop the case, but such a move is considered unlikely given the criticism it would provoke.

Legal analysts said perhaps the most surprising aspect of Rakoff’s decision was that it came at all. Settlements with federal regulators are almost always greenlighted by judges.

“This is an unprecedented judicial rebuke of the agency,” said Jacob Frenkel, a partner at law firm Shulman Rogers Gandal Pordy & Ecker in Potomac, Md., and a former attorney in the SEC’s enforcement unit. “I think it telegraphs a new level of scrutiny of settlements.”

One option for regulators, Frenkel said, would be to charge individual BofA executives with wrongdoing and seek financial penalties from them rather than from the company itself. Presumably, those penalties would be paid by liability insurance that companies typically carry on their top executives.

Barry Barbash, a partner at Wilkie Farr & Gallagher in Washington and a former head of the SEC’s investment-management division, said he couldn’t recall another case of a judge dealing such a smack-down to the agency.

“It may be a sign of the times,” Barbash said, referring to the taint on the SEC from the Madoff debacle. “Judges read the newspapers too.”

Defenders of the SEC say it’s chronically underfunded and must rely on settlements because it has the resources to pursue only a handful of cases.

But if regulators respond to Rakoff’s decision -- and similar rulings that might follow -- by taking more cases to court instead of settling, the agency will ultimately improve its credibility, Coffee of New York University predicted.

“It’s better that they win some and lose some rather than settle everything,” he said.


Times staff writer Jim Puzzanghera in Washington contributed to this report.