Southern District of New York Judge Jed S. Rakoff took strong exception Monday to a proposed settlement in which Bank of America would pay a $33 million fine to the Securities and Exchange Commission for not disclosing that Merrill Lynch was authorized to pay more than $5 billion in discretionary bonuses before the two entities merged in 2008.
During a 90-minute hearing in a packed Manhattan federal courtroom, Rakoff told David Rosenfeld of the SEC and Lewis J. Liman of Cleary Gottlieb Steen & Hamilton, representing Bank of America, he had "serious misgivings" about a settlement that "lacked in transparency." The judge repeatedly expressed concern that money that Bank of America received from the government through the Troubled Asset Relief Program was used, "as a practical matter," to pay the bonuses.
Rakoff also noted that the proposed $33 million fine was "a tiny, tiny fraction" of the billions of dollars the two banks paid out in bonuses in 2008. A total of $3.6 billion in bonuses was ultimately paid before the merger to more than 39,400 employees in a move Merrill said was needed to encourage the retention of Wall Street talent. The SEC announced the settlement on Aug. 3, the same day it filed suit against Bank of America, saying the bank had made material misrepresentations and omissions in a proxy statement sent to shareholders who approved the merger.
In questioning about attorneys' roles for Bank of America and Merrill Lynch and on the drafting of the proxy statement and merger agreements, Rakoff probed the SEC's allegations that the Bank of America promised its shareholders that Merrill would not pay year-end bonuses without getting BofA's prior consent, and asked SEC officials who exactly approved the year-end bonuses. "Was this some sort of ghost that performed these actions?" Rakoff asked Rosenfeld. "Or were there human beings who wrote these documents?"
Rosenfeld demurred, but Rakoff continued, asking if former Merrill CEO John Thain and Bank of America CEO Kenneth Lewis were responsible for the bonuses. Rosenfeld said that both men had been advised by their lawyers, but that Thain and Lewis had not been a focus of the investigation.
"I need a much more detailed account of the underlying facts" before deciding whether to approve the settlement, Rakoff told the lawyers.
Rakoff asked for briefing on several issues, including whether "this is a case that requires or permits the heightened scrutiny" demanded where the public interest is involved.
Papers in the matter are due Sept. 9.
Information from the Am Law Daily Litigation blog and The Associated Press contributed to this report.