WASHINGTON — A federal judge in New York Monday said he will not decide until Feb. 19 whether to accept the Securities and Exchange Commission settlement with Bank of America over allegations it misled shareholders and the federal government about its merger with Merrill Lynch.
Judge Jed S. Rakoff, who sits on the U.S. District Court for the Southern District of New York in Manhattan, said he would send the SEC a series of questions on Thursday. Sources said he appeared concerned with the evidence underlying the SEC’s decision to settle the charges with the bank and the evidence behind the New York attorney general’s lawsuit against the bank and its former executives.
Rakoff last year rejected a prior settlement between Bank of America and the SEC that would have involved the bank paying $33 million.
Under the latest settlements with the SEC and North Carolina attorney general, B of A agreed to pay a $150 million civil penalty, most of which will be distributed to harmed shareholders; to disgorge $1.00 to facilitate the payments to shareholders, and to strengthen its corporate governance and disclosure practices.
The settlements were announced last week, the same day that New York Attorney General Andrew Cuomo, joined by Neil Barofsky, the special inspector general of the Troubled Asset Relief Program, filed charges under the Martin Act in state Supreme Court against the bank, its former chief executive officer Kenneth Lewis, and its former chief financial officer Joseph Price.
Cuomo said the settlement and lawsuit made sense because the bank could begin remedial actions while he pursued wrongdoing.
But a spokesman for B of A and lawyers for Lewis and White said Cuomo’s charges were without merit, and cited as an example the SEC’s decision not to pursue charges against Lewis and Price.
“The evidence demonstrates that Bank of America and its executives, including Ken Lewis and Joe Price, at all times acted in good faith and consistent with their legal and fiduciary obligations. In fact, the SEC had access to the same evidence as the NYAG and concluded that there was no basis to enter either a charge of fraud or to charge individuals, ” the Bank of America spokesman said.
Mary Jo White, a partner at Debevoise & Plimpton LLP and former U.S. attorney for the Southern District of New York, is representing Lewis. William Jeffress Jr., a partner at Baker Botts LLP, is representing Price.
Cuomo claims in his suit that the bank’s management intentionally failed to disclose massive losses at Merrill so shareholders would vote to approve the merger. Once the merger was approved, management manipulated the federal government into saving the deal with billions of dollars of taxpayer funds by falsely claiming they would back out without bailout funds, Cuomo claims.
“This merger is a classic example of how the actions of our nation’s largest financial institutions led to the near-collapse of our financial system,” he said. “Bank of America, through its top management, engaged in a concerted effort to deceive shareholders and American taxpayers at large. This was an arrogant scheme hatched by the bank’s top executives who believed they could play by their own set of rules. In the end, they committed an enormous fraud and American taxpayers ended up paying billions for Bank of America’s misdeeds.”
Bank of America announced a plan to buy Merrill Lynch on Sept. 15, 2008, and a shareholder vote was scheduled for Dec. 5, 2008. But by the day of the vote, Merrill had incurred actual losses of more than $16 billion, Cuomo said, adding that Lewis and Price knew about the massive losses but did not disclose them to shareholders.
Cuomo said they also allowed Merrill to pay out $3.5 billion in undisclosed bonuses despite the losses. Lewis then allegedly misled federal regulators by telling them that the bank could not complete the merger with a bailout. However, by the time Lewis sought the funds and threatened to terminate the merger agreement without them, Merrill’s actual losses had only increased by another $1.4 billion, Cuomo said.
Bank of America received more than $20 billion of federal aid, which it has since repaid.