SEC's Deal With Bank Of America Rejected

A federal judge has rejected an SEC settlement with Bank of America, writing that the government's justification is "at war with common sense." The Securities and Exchange Commission had charged Bank of America executives with misleading its shareholders over the acquisition of Merrill Lynch. Now that the settlement has been thrown out, the case will go to trial.

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RENEE MONTAGNE, host:

This is MORNING EDITION from NPR News. I'm Renee Montagne.

The troubles keep mounting for Bank of America. Last month, the company agreed to pay $33 million to settle charges that it lied to shareholders about bonuses paid to executives after its merger with Merrill Lynch. The settlement had been negotiated with the Securities and Exchange Commission. Then yesterday, a federal judge tossed out that settlement and told the bank to prepare for a trial instead. NPR's Jim Zarroli reports.

JIM ZARROLI: When a law enforcement agency like the SEC agrees to settle a case with a defendant the settlement has to be reviewed by a federal judge. And the judge usually ends up approving it. This time, federal Judge Jed Rakoff has refused to do so.

The settlement grew out of Bank of America's shotgun marriage to Merrill Lynch last fall. The merger had been brokered by the federal government at considerable expense to taxpayers. After it was finalized, Bank of America revealed that it had approved $5.8 billion in bonuses to Merrill executives. Company officials said they learned about the bonuses only after the deal had gone through and were contractually obligated to pay them.

But the bonuses generated enormous public criticism. SEC officials ultimately charged the company with misleading shareholders and fined it $33 million. But to many critics the settlement itself fell short.

Democratic Congressman Brad Sherman of California said the penalty would ultimately be borne by Bank of America's shareholders, which means they would be victimized twice.

Representative BRAD SHERMAN (Democrat, California): The settlement called for the shareholders - the victims of that fraud - to pay money to the SEC, and the executives who misled the shareholders lose nothing.

ZARROLI: In recent weeks, Judge Rakoff made clear that he, too, had problems with the settlement. And in court he peppered both sides with questions about who had approved the bonuses and when. Anthony Sabino is a professor of law and business at St. John's University.

Professor ANTHONY SABINO (Law and business, St. Johns University): You can't say yes to something unless you have adequate information. And the judge pretty much from the get go was critical of the level of information that was disclosed here.

ZARROLI: Yesterday, the judge issued a ruling rejecting the settlement altogether. He said the settlement does not comport with the most elementary notions of justice and morality. He called it, quote, "a contrivance, designed to provide the SEC with the façade of enforcement and the management of the bank with a quick resolution of an embarrassing inquiry, all at the expense of shareholders," unquote.

The settlement is an enormous embarrassment for the SEC. Securities lawyer Jacob Frenkel of Shulman Rogers says not only did the judge take the unusual step of rejecting a settlement…

Mr. JACOB FRENKEL (Attorney, Shulman Rogers): But here the judge issued a stinging rebuke and criticism not only of the settlement itself but the rationale underlying the settlement.

ZARROLI: The SEC issued a statement yesterday defending its actions, saying it believed it had balanced all relevant considerations. The commission has noted that Bank of America executives had claimed they were following the advice of lawyers, who are protected by attorney-client privilege. So it would be hard for the commission to win a case.

The judge's ruling is also a huge setback for Bank of America. The company already faces enormous financial challenges because of the recession and the housing crisis. The controversy over the Merrill bonuses has added fuel to the fire. New York Attorney General Andrew Cuomo is reportedly preparing charges against bank executives.

Again, Anthony Sabino.

Mr. SABINO: This minor distraction has now become a major distraction. That's just bad for business. So they need to do something and get this resolved and get it out of the way.

ZARROLI: But that's harder than it sounds. Judge Rakoff has ordered both the SEC and Bank of America to prepare for a trial in February in next year. Whether or not the trial actually takes place, law enforcement officials have made clear they want to know the full story of the controversial bonuses and they're not willing to let the case be swept under the rug.

Jim Zarroli, NPR News.

MONTAGNE: In the poor judgment department, a senior vice president at Wells Fargo Bank has been fired, following reports she held lavish parties at a Malibu beach house after the bank had foreclosed on the property.

According to the Los Angeles Times, the executive, Cheronda Guyton, spent time and entertained at the $12 million home. The previous owners lost their fortune and the house in the Bernard Madoff scandal. Wells Fargo has, of course, received billions in federal bailout money and had been criticized earlier this year for planning upscale events in Las Vegas for top employees.

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