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Goodness knows there’s been no shortage of analysis of the Securities and Exchange Commission’s star-crossed case against Bank of America for disclosure failures in BofA’s $50 billion Merrill Lynch buyout. Most notably, Manhattan federal district court judge Jed Rakoff gave both BofA and the SEC an earful when he refused to sign off on their initial $33 million settlement proposal in September 2009. The judge continued to elaborate concerns about the deal when he grudgingly approved a beefed-up $150 million settlement in February. Now the SEC’s own office of inspector general is piling on. In a compelling new report, Inspector General H. David Kotz concludes that the SEC staff did conduct a diligent and zealous investigation of BofA’s potential securities law violations in the January 2009 Merrill deal. But the report also finds that SEC lawyers limited their investigation, failed to target individual defendants, and allowed BofA to extract concessions in negotiations because they felt pressure to bring their case quickly and because they thought BofA deserved “deference” as a recipient of bailout funds under the Troubled Asset Relief Program. The SEC’s initial case, you’ll recall, boiled down to BofA’s failure to disclose its authorization of billions of dollars in bonuses for Merrill employees in advance of the Merrill buyout. But the OIG report shows that from the beginning, the SEC was also investigating BofA’s alleged failure to disclose to shareholders the enormous losses that Merrill had sustained in October and November 2008. Those allegations didn’t surface in the SEC complaint Judge Rakoff rejected, and now we know why: The report says the SEC enforcement staff chose to limit its initial action to the bonus issue because staff lawyers “felt pressure to bring a case against BofA promptly because of the internal interest in the case and its high-profile nature.” In addition, the report finds, senior SEC officials were worried about the difficulty of building a case based on BofA’s alleged failure to disclose Merrill’s mounting losses. The inspector general’s report also reveals that SEC corporate finance officials wanted the BofA settlement to strip the bank of its well-known-seasoned-issuer status and its safe harbor status with regard to forward-looking statements. But at a July 2009 meeting discussing the initial settlement, “BofA argued that the dire state of the financial markets made it critical that it be able to raise money quickly,” the report says. The agency ultimately gave in because officials decided “it would not be in the interest of the market or investors to prevent [BofA] from getting to the market as quickly as [its] competitors,” particularly because BofA was a TARP recipient. Before approving the SEC’s final $150 million settlement with BofA, Judge Rakoff expressed disbelief that the agency had failed to single out any individual defendants in its enforcement action, especially since N.Y. Attorney General Andrew Cuomo’s parallel complaint against BofA named former CEO Kenneth Lewis and former CFO Joseph Price. The new OIG report explains that SEC lawyers did not realize they could sue individuals at BofA under certain securities laws until after Judge Rakoff rejected the original settlement. At that point, the report says, the second enforcement team to tackle the issue decided it would be too difficult to go after individual defendants. The report also discusses the intense wrangling between the SEC and Cuomo’s office over the AG’s refusal to share information from its own investigation of BofA’s Merrill acquisition. Even without the AG’s evidence, however, “the SEC attorneys expressed the view that they were able to ascertain what evidence the NYAG had developed and did not believe the NYAG was in possession of facts that would have led the SEC to charge individuals,” the inspector general writes. The OIG opened its investigation in August 2009, originally in response to concerns raised by Maryland Congressman Elijah Cummings and a Washington Post article questioning whether the SEC faced conflicts of interest in enforcement actions against TARP bailout fund recipients. (The investigation was expanded after Judge Rakoff began questioning the BofA settlement.) The inspector general did not find evidence of “improper conflicts.”

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