A judge promised Monday to decide by the end of next week whether to approve a $150 million settlement between the Securities and Exchange Commission and
Bank of America over civil charges alleging the bank misled shareholders when it acquired Merrill Lynch.
U.S. District Judge Jed Rakoff said he will decide only after giving lawyers on both sides a written list of questions he has and hearing their responses.
Rakoff last year rejected a $33 million settlement stemming from the early 2009 acquisition, calling it a breach of "justice and morality" that was "done at the expense, not only of the shareholders, but also of the truth."
He made clear that the new pact will require some changes, including the possibility of leaving the court some ability to oversee important issues related to the company such as compensation.
The SEC had accused
Bank of America of failing to disclose to shareholders that it had authorized Merrill to pay up to $5.8 billion in bonuses to its employees in 2008 even though the investment bank lost $27.6 billion that year.
In reviewing the new settlement, Rakoff said he did not think it made sense to leave no oversight of the company in choosing its compensation consultant, especially given the "incredibly bloated compensation of too many executives in too many American companies."
He said he will rule by Feb. 19 whether to accept the deal announced last week. If he rules against it, a trial in the civil case brought by the SEC against
Bank of America is scheduled to start March 1.
SEC spokesman John Nester in Washington said, "We will respond to the court's questions as requested."
Rakoff questioned whether the deal requiring a company to pay its shareholders was, in essence, a payment by shareholders to shareholders.
SEC lawyer George S. Canellos said a penalty expense for a large corporation does not necessarily come from shareholders because a company can trim money from other parts of the business such as bonus and salaries.
At one point, Rakoff questioned why the amount to be paid shareholders could not be $300 million or $600 million. Canellos said the amount the parties settled on was considered as a penalty for the company rather than a compensation scheme for shareholders. He also noted there had been a high turnover in shareholders since the acquisition.
At the start of the hearing, Rakoff put the SEC on the defensive as he read from a harshly critical recounting of the facts in a complaint filed last week by the New York Attorney General's office against
Bank of America.
He said the charges brought by the attorney general's office contained "in very great detail in 85 pages a great many allegations that seem far more suggestive of intentional fraud than anything presented by the SEC."
Canellos said the SEC was looking at the same facts and evidence as New York state but was focused on being "absolutely fair and impartial judges of the evidence before us."
The judge questioned why the SEC did not come to the same conclusion as New York that the firing of
Bank of America's general counsel in December 2008 came about because the lawyer wanted to force the company to disclose damaging information to shareholders.
"We do not credit that as accurate," Canellos said. "It is an inference that does not derive from any evidence."
Rakoff countered: "I've been presented with two strikingly different versions of the facts."
Later, Rakoff said the recommendations in the settlement for changes at
Bank of America to prevent a repeat of its problems during its acquisition "strike me as quite positive."
Bank of America lawyer Lewis J. Liman said he would need to consult further with the company before responding to some of the judge's questions but he was firm in stating that the company wanted to retain independent control over its compensation policies.
He said "a further order would not be supported by the evidence or the allegations. There are no allegations about BOA pay practices."
