SEC and Cuomo handling the Merill Lynch bonuses; Cuomo using Martin Act in future?

SEC
Busy and slightly convoluted week for the SEC. AmLawLitigDaily reported Tuesday that Bank of America (“BofA”) had paid the SEC $ 33 million to settle a complaint moments before it was filed in the Southern District Court of New York. The settlement, of course, neither admits or denies the charges, and the SEC has publicly indicated it is continuing its investigation into related matters. (Separately, but beating the same horse, today the House Committee on Oversight and Government Reform requested BofA produce all documents related to the Merrill Lynch ("ML") acquisition). The complaint alleged BofA mislead its shareholders prior to the ML acquisition about ML bonuses. Specifically, the complaint alleges:

Bank of America represented in the merger agreement that Merrill had agreed not to pay any bonuses to its executives before the merger closed, except as set forth in a schedule. Unbeknownst to shareholders, the schedule was already in place weeks before the proxy statement was filed with the SEC and disseminated to shareholders. Under the schedule, Bank of America had agreed that Merrill could pay up to $5.8 billion, or nearly 12 percent of the $50 billion merger consideration, in discretionary bonuses to its executives. The merger agreement was included as an appendix and summarized in the joint proxy statement that was distributed to all 283,000 shareholders of both companies. But Bank of America's agreement to allow Merrill to pay these discretionary bonuses was in a separate document that was omitted from the proxy statement and whose contents were never disclosed before the shareholders' vote on the merger. (n. 0).

And so thinking it was a done deal, we all waited for court approval of the settlement … which didn’t happen. Wednesday, the same Court declined to approve the settlement over concerns the $ 33 million would come out of the $ 20 billion bailout BofA received last year. A hearing is scheduled Monday to discuss the matter. There has been media discussion of how the settlement and continuing investigation have – once again – burdened BofA shareholders. The Monday hearing is anticipated to truly bring to light how the BofA / ML deal was done.

Cuomo
New York Attorney General (“AG”) is also well-aware of the matter. Earlier this year, AG Cuomo successfully compelled former Merrill CEO John Thain to divulge the names of those who received the $ 3.6 billion in bonuses. (n.1). The complaint relied on authority under the Martin Act. The Martin Act is one of New York state’s blue sky provisions, and gives the AG broad powers to investigate and litigate financial fraud. (n.2). The purpose of the act is to prevent any form of deception related to securities. (n.3). The Act gives the AG discretion as to what matters to investigate, and provides power to subpoena witnesses and produce evidence. (n.4).


In moving forward on the matter of Merrill bonuses, the AG’s office may be looking to cases such as Loengard. (n. 5). In Loengard, plaintiff minority shareholders claimed that defendants – a parent and wholly-owned subsidiary involved in a short form merger – acted fraudulently by not providing the plaintiffs with notice of the merger, and by deflating the value of the plaintiffs’ shares. After lengthy litigation, the District Court found that plaintiffs failed to state a cause of action under the Martin Act for failure to show fraudulent conduct. The Court reasoned that fraudulent conduct under the Act was understood as a “ ‘tendency’ to deceive or mislead.” (n. 6). The Court did not find the appraisal of plaintiff’s shares fraudulent, or that the defendants had any duty under the law to provide the plaintiffs with notice of the merger.

In light of the AG's much-discussed report on bonus compensation released last week, it is unlikely Cuomo's current silence on the Merrill matter signifies any abdication on his part. The Martin Act has been effective for him to date, and may produce ongoing results for him moving forward in the matter.

(n. 0). Securities and Exchange Commission Press Release, 2009-177, August 3, 2009.
(n.1). People of the State of New York v. John Thain, 2009 NY Slip Op 29114 (table), 2009 N.Y. Misc. LEXIS 591 (2009) (court denied the third party’s right to intervene).
(n. 2). New York General Business Law §§ 352-c (2009). See also §§ 339-a, 352-353.
(n. 3). People v. Lexington Sixty-First Associates, 381 N.Y.S.2d 836, 840 (N.Y. 1976).
(n. 4). Thain, 2009 N.Y. Misc. LEXIS 591 at **1-2 (citing §§ 352(102)).
(n. 5) Loengard v. Santa Fe Industries, Inc., 573 F. Supp. 1355 (S.D.N.Y. 1983), later proceeding, 639 F. Supp. 673 (S.D.N.Y. 1986).
(n. 6) Id. At 675.

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