Putting BofA's Merrill Acquisition on Trial

In rejecting Bank of America's deal with the SEC, a federal judge has challenged the government and the bank. Is the Merrill takeover in question?

By Dean Foust

In the corporate world it can be messy negotiating a merger. For Bank of America, it appears the backroom drama behind its deal for Merrill Lynch is going to be aired in public.

The Sept. 14 decision by a federal judge to reject the $33 million fine Bank of America (BAC) agreed to pay to settle government charges that it withheld material information ahead of the shareholders' vote on the deal was a major setback for the Charlotte-based bank. While BofA's management had hoped the settlement with the Securities & Exchange Commission would help end the controversy over the Merrill acquisition, the bank now faces two equally bad outcomes.

At best, the judge's ruling forces the SEC to go public with more of the behind-the-scenes jousting between BofA and regulators. Worse, it could force the SEC to bring charges against any specific BofA executives that it believes decided not to disclose the unreported losses and executive bonuses before shareholders voted. "BofA is in serious, serious trouble now," says Anthony Sabino, a professor of law and business at St. John's University.

The ruling by U.S. District Court Judge Jed S. Rakoff wasn't entirely surprising given that he'd already signaled his uneasiness with the SEC's settlement. On Aug. 10, Rakoff refused to approve the settlement. He further demanded that the SEC provide more details as to whether BofA executives knew about the looming losses and bonus payouts at Merrill—and if so, who made the decision not to disclose this information to shareholders ahead of the December vote on the deal. Rakoff conceded that settlements like this were often in the best interest of all parties, sparing them the cost and distractions of litigation. But in his latest ruling, the judge said the proposed $33 million settlement "suggests a rather cynical relationship between the parties: The SEC gets to claim that it is exposing wrongdoing on the part of Bank of America in a high-profile merger; the bank's management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense not only of the shareholders, but also of the truth."

Both Sides Are on the Defensive

As a result, Rakoff wrote that he was "forced to conclude that the proposed consent judgment is neither fair, nor reasonable, nor adequate" to protect the public's interest. He told both sides to prepare for a Feb. 1 trial on the SEC's allegations.

A Bank of America spokesman said: "We disagree with today's ruling. Bank of America believes the facts demonstrate that proper disclosure was made to shareholders about Merrill bonuses. We are prepared to prove that through litigation. We will consider all our legal options over the coming days." At the SEC, officials defended the original settlement. "We believe the proposed settlement properly balanced all of the relevant considerations," spokesman John Nester said. "We will carefully review the court's most recent order."

If Bank of America had little interest in seeing the Merrill deal dissected publicly, the SEC may not have had much more. With the judge refusing to rubber-stamp the settlement, the SEC may have no other choice but to deepen its investigation into why BofA didn't disclose the $3.6 billion in bonuses Merrill was preparing to pay its executives—as well as its failure to alert shareholders to the ballooning losses at Merrill.

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