Stunning Agreement with SEC Could Haunt BofA for Years

Monday’s $150 million settlement between Bank of America and the Securities & Exchange Commission was “stunning” and will haunt the bank for years to come, according to one industry analyst.

Monday, Judge Jed S. Rakoff from the U.S. District Court for the Southern District of New York “reluctantly approved” the $150 million settlement between the bank and the SEC regarding the bank’s disclosures of financial losses at Merrill Lynch prior to the acquisition of the brokerage firm. Rakoff did not think the settlement truly addressed the issues of fairness and public interest, but he said that both sides had reminded him that the law specifies that the SEC be given “substantial deference” as a regulatory body.

Under the current agreement, the SEC asked BofA to undertake reforms pertaining to the bank’s disclosure process in addition to the multi-million penalty, according to the SEC’s legal brief filed earlier this month.

Chip Roame, managing principal of Tiburon Strategic Advisors, said the settlement essentially concedes that Bank of America [BAC] had been wrong. The original proposal had called for the bank to pay $33 million, but that was shot down by Rakoff.

Roame says the new settlement also opens the door wider for New York Attorney General Andrew Cuomo, who also filed suit against the bank and former executives. Moreover, this also paves that way for possible shareholder lawsuits, Roame says. Earlier this month, New York Attorney General Andrew Cuomo’s office also filed charges against BofA as well as former chief executive Kenneth Lewis and former chief financial officer Joseph Price for allegedly hiding losses at Merrill Lynch before its acquisition of the brokerage firm.

According to that lawsuit, Bank of America’s management intentionally failed to disclose massive losses at Merrill before shareholders approved the acquisition. Moreover, once the deal was approved, management then allegedly manipulated the federal government into granting a massive taxpayer bailout, according to the complaint. Cuomo’s suit is still pending.

Bank of America did not respond to any of these latest comments, but it did say Monday in an email that is was “pleased that the settlement with the SEC has been approved.”

The Attorney General’s office did not respond to a phone call about its suit against BofA, but an article in The Wall Street Journal blog said that while the new settlement sends some “mixed signals” about Cuomo’s suit, his office was “quick to declare the ruling bolstered its case.”

Last September, Judge Rakoff had rejected the proposed settlement of $33 million, partly on the grounds that it was unfair to BofA’s shareholders. This time, according to other press reports, he demanded that the settlement be adjusted so that funds would be distributed specifically to the legacy BofA shareholders harmed by the non-disclosures and not the Merrill Lynch shareholders. The judge also asked the SEC and the bank to include a provision, which had already been agreed upon, for the SEC to have a say in the hiring of an independent auditor to assess whether the bank’s accounting controls and procedures are adequate.

The court action stems from BofA’s $50 billion acquisition of Merrill Lynch at the height of the financial crisis in the fall of 2008 and the failure of management to disclose massive losses at Merrill before shareholders approved the deal. The SEC has maintained that senior management and in-house counsel “erroneously concluded that no disclosure was necessary because the projected quarterly loss was within the range of losses that Merrill had sustained in the preceding five quarters.”