The Securities and Exchange Commission is attempting to add charges to its civil suit against Bank of America over failing to disclose extraordinary losses at Merrill Lynch when the bank took over the brokerage firm in a controversial merger, The Wall Street Journal reported Monday.
A bank spokesman said the SEC did not find that any specific individual had intentionally misguided investors. So the new charges, if approved by U.S. District Court Judge Rakoff, will be for negligence instead of fraud, the spokesman said.
In an email, the bank said, “We are pleased that the SEC, after investigating the matter thoroughly, has found no basis to charge any individuals at Bank of America or to assert a charge of fraud. Despite this vindication, we believe the new claims the SEC seeks to bring are without merit and we will oppose this motion.”
In the lawsuit posted on the SEC’s website, the regulator said “Bank of America kept shareholders in the dark as they were called upon to vote on the proposed merger at the end of a quarter of nearly unprecedented volatility and uncertainty.”
The amended complaint adds an allegation that BofA has violated Section 14(a) of the Securities Exchange Act of 1934 and SEC Rule 14a-9 by failing to make any disclosure to its shareholders of the losses that Merrill Lynch incurred in the two-month period leading to the Dec. 5, 2008 shareholder vote. The SEC’s suit stated that “the absence of any disclosure concerning Merrill’s tremendous losses deprived shareholders of up-to-date information that was critical to their ability to evaluate whether to approve the merger upon the terms presented to them.” The SEC further alleged that BofA had become aware of $4.5 billion in net losses that Merrill had sustained in October, and estimated approximately $4 billion in additional losses in November.
In addition, the SEC said that BofA withheld material information from its shareholders and misled them about an agreement it had reached with Merrill in September concerning the payment of discretionary year-end bonuses.
BofA “represented that Merrill had agreed not to pay year-end bonuses or other discretionary compensation to its employees and executives prior to the closing of the merger without Bank of America’s consent. In fact, contrary to that representation, Bank of America had already previously agreed that Merrill could pay up to $5.8 billion—nearly 12% of the merger consideration as of the time the parties entered into the merger agreement—in discretionary year-end bonuses.” The SEC alleged the deal to pay the bonuses “was memorialized in a separate schedule that was omitted from the proxy statement and whose contents were never disclosed before the shareholder vote on December 5, 2008.”
The lawsuit details how despite revised forecasts about Merrill’s looming losses, 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. However, the SEC isn’t making any charges against individual executives or lawyers involved in the negotiations.
In September, U.S. District Court Judge Rakoff had shot down a controversial settlement between Bank of America and the SEC over the bonuses paid to Merrill Lynch employees last year. Rakoff found that the settlement reached on August 3, under which BofA would pay the SEC a $33 million fine, was unfair to BofA’s shareholders.
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