Judge Rakoff had some more tough questions, though, for SEC and BofA lawyers. (We would expect no less of him, after all.) The judge was particularly interested in the discrepancy–which he called “striking”–between the SEC’s version of events, laid out in a statement of facts accompanying its proposed settlement, and the account put forward by New York attorney general Andrew Cuomo in his simultaneously-filed complaint against the bank and its former CEO.
Rakoff chided the N.Y. AG’s office for the rhetoric in its complaint: “After reading it, I knew that the role of Roget’s Thesaurus was not dead,” he said, adding, “I expected to hear the sound of fire engines.” But he also credited the office with laying out a coherent narrative. “[The N.Y. AG] sets forth in very great detail–in 85 pages–a great many allegations that seem far more suggestive of possible fraud than anything proposed by the SEC,” Rakoff said.
Specifically, the judge said he wanted to know more from the SEC about the events surrounding the firing of Timothy Mayopoulos, the bank’s former general counsel, and the role of Bank of America’s outside counsel–Wachtell, Lipton, Rosen & Katz–in advising the company on its disclosure obligations. (We’re interested in the same things; we wrote Monday about Cuomo’s allegations that BofA senior management misled Mayopoulos and Wachtell about Merrill’s losses.) The Cuomo complaint, Rakoff noted, states that once Mayopoulos became aware of Merrill’s true losses in early December (after shareholders voted on the merger), he was fired, implying that the two events were related.
The SEC told the judge that Cuomo’s account “didn’t derive from any evidence.” George Canellos, the regional director of the SEC’s New York office, acknowledged that it was unclear from the SEC’s investigation whether Mayopoulos believed before the shareholder vote that Merrill losses were $7 billion or closer to $9 billion. (Canellos said there was “tension” in the evidence.) But the SEC lawyer insisted there was no evidence of any bank executives hiding information from lawyers. He also said that Mayopoulos was fired because the board wanted to give his job to Brian Moynihan, a former lawyer who then headed Bank of America’s investment banking business and was threatening to leave after the Merrill merger was completed.
Canellos told Rakoff he agreed, more or less, with Cuomo’s contention that the Wachtell lawyers had been “marginalized” as bank officials decided what to disclose about Merrill’s losses. He said that while Mayopoulos had asked Wachtell to research the company’s disclosure obligations in mid-November 2008, he didn’t give the lawyers the most up-to-date numbers on Merrill losses as the shareholder merger vote approached.
Rakoff didn’t endorse either Cuomo’s or the SEC’s versions of what happened with Mayopoulos and Wachtell. Instead, he asked the SEC to show him what was in the record so he could decide for himself.
The judge also had questions about the remedial portions of the proposed settlement, such as the requirement that Bank of America retain a compensation consultant for three years. He asked whether the consultant should be appointed by the BofA board’s audit committee or, given the bloated executive pay packages that compensation consultants have approved, by Rakoff himself. He also seemed to knock down an argument advanced by Bank of America lawyer Lewis Liman of Cleary Gottlieb Steen & Hamilton, who said that the audit committee could be trusted to select the consultant since Bank of America’s compensation system wasn’t challenged by the SEC.
“I find that difficult to understand,” Rakoff said. “If it’s irrelevant to the allegations, then why is it here? It can’t just be window dressing.”
Rakoff told the lawyers on both sides that he would issue an order laying out his questions about the new settlement proposal on Thursday. He also said he hoped to rule on a revised proposed settlement by Feb. 19, well in advance of the case’s March 1 trial date.
At BofA’s counsel table with Liman were Cleary partner Victor Hou and Brad Karp and Daniel Kramer of Paul Weiss Rifkind Wharton & Garrison. The SEC’s enforcement director, Robert Khuzami, and his deputy, Lorin Reisner, were seated in the audience.