New Subpoenas in Bank of America Merger Probe

March 4, 2009 — -- Seven executives who received multimillion-dollar cash-and-stock pay packages from Merrill Lynch just prior to its merger with Bank of America will be the latest executives from the two firms to face subpoenas from New York Attorney General Andrew Cuomo, according to sources involved in the investigation into the merger's tangled finances.

At least four other senior executives already have been subpoenaed in Cuomo's investigation and at least three have testified.

The latest executives facing subpoenas had cash and stock paydays in 2008 that ranged from about $13 million to $39.4 million -- largely from the bonus component of their pay packets, The Wall Street Journal reported today. The reported compensation occurred during a year when Merrill was a failing institution.

Cuomo's investigation is probing the merger and the so-called "variable incentive compensation program" that resulted in $3.6 billion in bonuses in a year that Merrill lost $27.6 billion.

Under the broad authority given his office as New York's attorney general, Cuomo seeks to determine if any securities laws were violated in the way the performance bonuses were awarded on an accelerated schedule in advance of the merger by a team that included former Merrill CEO John Thain in consultation with top Bank of America officials.

To that end, he has subpoenaed Thain and Ken Lewis, the CEO of Bank of America, as well as two top aides involved in the merger and bonus process.

That probe is still in a "fact gathering stage" according to sources familiar with the investigation.

Merrill's bonuses historically were paid following the close of a calendar year. But the 2008 bonuses were paid in December, just weeks before the January date on which the merger was finalized.

Amid failing banks and a recession, the astronomical compensation of bank and finance executives has become a hot-button issue.

According to the Journal, despite Merrill's losses of $27.6 billion in 2008, its top investment banker, Andrea Orcel, was paid about $33.8 million in cash and stock. The firm's head of global strategy, at Merrill "for only three months," Peter Kraus, had an employment contract worth $29 million. In addition, the Journal reported, Thomas Montag, the head of global sales and trading, made $39.4 million, although he joined the firm in August and had been there less than six months when the packages were awarded.

The three men and four other high-fliers are in the process of being served subpoenas to testify under oath at the New York attorney general's Manhattan offices, sources said. The answers sought, according to sources close to that investigation, are similar to those sought from Lewis and Thain.

The fresh flurry of subpoenas were readied Wednesday. Some were served. In other cases, the subjects were still being sought, sources said.

Cuomo's office had no public comment on the subpoenas.

"Essentially, they will be asked to describe the work they did, asked about their individual compensation packages, asked what they knew about the timing of the bonus awards and about who at Merrill and Bank of America was involved in that process," a source said.

In a February letter to House Financial Services Committee Chairman Barney Frank, D-Mass., Cuomo explained: "In a surprising fit of corporate irresponsibility, it appears that, instead of disclosing their bonus plans in a transparent way as requested by my office, Merrill Lynch secretly moved up the planned date to allocate bonuses and then richly rewarded their failed executives. Merrill Lynch had never before awarded bonuses at such an early date, and this timetable allowed Merrill to dole out huge bonuses ahead of their awful fourth quarter earnings announcement and before the planned takeover of Merrill by Bank of America."

The issue of naming names from among the top earners at Merrill who netted a rich slice of a $3.6 billion bonus pool has been a contentious part of the Cuomo probe.

Thain, Merrill's former CEO, had to be served two subpoenas before he answered any questions on the bonuses. During his first deposition, he cited direction from Bank of America as the reason he would not answer. A judge in Manhattan State Supreme Court ordered him to testify and said the information would remain confidential until at least March 13, when he would rule on the matter.

Merrill's four top executives earned $121 million in 2008. There were 696 employees who earned bonuses worth more than $1 million. And according to the Journal, the top 10 earners made a combined $209 million "as the firm foundered." Also, according to the Journal, the bulk of that money was in the form of bonuses, as the base salaries for top Merrill executives "generally range from $200,000 to $750,000."

The new subpoenas for testimony are for Orcel, David Sobotka, head of global proprietary trading, Kraus, Montag, David Gu, David Goodman and Fares Noujaim, sources close to the investigation said.

The subpoenas were served even as Bank of America filed a petition asking Judge Bernard Fried to either "quash, fix conditions or modify" the subpoenas. Essentially, the bank wanted the names of bonus recipients and the amounts they received to remain confidential.

The bank asked that the subpoenas be changed "to include a confidentiality order such that the individual compensation information (including names and/or job titles and corresponding compensation amounts of Merrill and Bank of America employees who received bonuses in 2008) provided by Mr. Thain in response to the Thain Subpoena be kept confidential by the Attorney General's Office and not be disseminated to the public."

The bank asserted that no public interest would be served by the disclosure, nor was the disclosure relevant to the attorney general's investigation. With the petition, the bank filed a supporting memorandum.

Bank of America has stated in past, on the record, that it would be willing to provide Cuomo with the names and specific bonus information with the guarantee that the information remain confidential. Bank of America said Wednesday that it does not comment on subpoenas.