NEW YORK -- In a sharp rebuke for both Bank of America and the Securities and Exchange Commission, a New York federal judge on Monday rejected a proposed settlement between the two regarding $5.8 billion in bonuses to Merrill Lynch executives.
In August, the SEC charged that BofA had lied to its shareholders in November when it sought their approval to complete its $50 billion purchase of Merrill. The SEC said BofA told shareholders that Merrill employees wouldn't get bonuses without its consent. However, BofA had already authorized payments of up to $5.8 billion despite mounting losses of $15 billion at Merrill in the fourth quarter. BofA agreed to settle the case for $33 million without admitting any wrongdoing.
However, U.S. District Judge Jed Rakoff, in his Monday decision, said the proposed settlement was "neither fair, nor reasonable, nor adequate." Rakoff also said that if BofA "is innocent of lying to its shareholders, why is it prepared to pay $33 million of its shareholders' money as a penalty for lying to them?"
BofA bac said in a statement that it disagreed with the ruling and that it "believes the facts demonstrate that proper disclosure was made to shareholders about Merrill bonuses."
Rakoff wasn't kind either in his assessment of the SEC, which is already reeling from allegations of mishandling the probe of scam artist Bernard Madoff. "The proposed consent judgment was a contrivance designed to provide the SEC with the facade of enforcement," Rakoff said.
The SEC didn't comment on the judge's comments specifically, but spokesman John Nester said, "We believe the proposed settlement properly balanced all of the relevant considerations. We will carefully review the court's most recent order."
Shareholders, several of whom have sued BofA, were hopeful that the bank's board of directors would now be pressured to find out the truth. "The board hasn't held anyone accountable at the company," says Jonathan Finger, managing partner of Finger Interests, a BofA shareholder. Finger, who has in the past called for BofA CEO Kenneth Lewis' resignation, says that the board has been "too deferential" to the management team.
The judge's decision comes as BofA faced another Monday deadline to provide more details about the merger and the bonuses to New York Attorney General Andrew Cuomo, who has said the bank's executives could face possible fraud charges. Cuomo's office on Monday said there were no new developments.
Rakoff also said that the settlement would effectively punish shareholders twice. "The notion that Bank of America shareholders, having been lied to blatantly in connection with the multibillion-dollar purchase of a huge, nearly bankrupt company, need to lose another $33 million of their money in order to 'better assess the quality and performance of management' is absurd." He directed BofA and the SEC to prepare for a trial by Feb. 1.