John Merchant, CPA, CFE

In August 2009, the SEC sued Bank of America, claiming that Bank management had lied to its shareholders in order to complete a $50 billion acquisition of Merrill Lynch, an investment company that was nearly bankrupt, while secretly paying several billion dollars in bonuses to Merrill Lynch executives.  In short, the Commission contended that the shareholders of Bank of America were the victims of fraud. The SEC action appeared to be an effort to enforce the law and bring justice to the shareholders of Bank of America who had been wronged by management.  When the SEC and Bank of America reached an agreement to settle the suit through payment of a $33 million fine by the Bank, federal Judge Jed Rakoff shocked both sides by rejecting the settlement and advising them to be ready for trial by February.

Judge Rakoff ruled that the settlement lacked elements of fairness and called the proposed deal a sham. He specifically called the proposed settlement a “contrivance” that would allow the SEC to appear to be enforcing the law and protecting shareholders while allowing the management of the Bank to make an embarrassing situation disappear.  Judge Rakoff pointed out to the SEC that the proposed fine, when paid by the Bank, would essentially come out of the pockets of the Bank’s shareholders, the very people that the SEC claimed to be protecting.  He also was particularly irritated that the settlement allowed the Bank to avoid revealing the names of the executives who were aware of the secret bonus payments. Judge Rakoff’s ruling caused further embarrassment for the SEC which has endured heavy criticism from commentators who have blamed the Commission for failing to do its job and contributing to the financial meltdown of 2008.

And the news may be even worse for the Bank of America executives.  Reuters reports that Andrew Cuomo, the Attorney General of New York, is considering filing civil fraud charges against them in connection with the Merrill Lynch acquisition.

To read more about the background of this case, visit
http://www.reuters.com/article/governmentFilingsNews/idUSN1451182320090914.