Thursday, February 4, 2010

BofA settles with the SEC, is however sued by NYAG Cuomo

Busy day for BofA. I haven't had the opportunity to read through the 30-some page settlement proposal and 90 page complaint yet, but here's the surface data.

The SEC announced today it reached a settlement with BofA as regards both pending suits: failure to properly disclose Merrill bonuses, and separately, failure to properly disclose Merrill 4Q08 losses, to BofA shareholders prior to a proxy vote on the Merrill merger. The settlement submitted to S.D.N.Y. Rakoff for approval includes a $150 million fine and a remediation plan. The $150 million is to be distributed to BofA shareholders on an as yet undetermined schedule. The remediation plan includes new corporate governance for BofA over the next three years: retention of an independent auditor to scrutinize disclosure procedures, as well as "disclosure counsel" who will report to the Board's Audit Committee; the CEO and CFO will certify that they have personally reviewed annual and merger proxy statements; new conflict rules for members of and consultants to the Board's Compensation Committee; a non-binding advisory shareholder say-on-pay vote on matters of executive compensation; and incentive compensation practices will be disclosed on BofA's consumer website.

Half a dozen things come to mind. First, one of the principal reasons Judge Rakoff rejected the Summer 2008 settlement was he felt it unfair that shareholders would bear the burden of the mistake BofA corporate actors made. This has been part of Rakoff's theme – unending in that it has never been answered – that individual actors are responsible for making the decision not to disclose the Merrill bonuses. It remains to be seen how Rakoff will respond to the new terms of the settlement. And I'm not quite certain how the shareholders will benefit from paying themselves a sort of dividend payment on the matter (because although the distribution schedule is as yet undetermined, that's effectively what will happen, correct? BofA pays the fine to the SEC, and then the SEC redistributes the fine to BofA shareholders?).

And second, the SEC includes a lengthy laundry list of 'thank yous' in its public relations release, including the FBI, NCAG Cooper, and TARP's Special Inspector. There has been months of rumor that Cooper and the FBI were working in tandem on separate charges >> I am eager to have the opportunity to read the settlement proposal to see if Cooper has waived any further litigation with the SEC settlement.

And although the SEC also thanks NYAG Cuomo's office, we all know now that Cuomo certainly made no such waiver. Cuomo's office has filed a civil securities suit under the Martin Act against BofA, its former CEO Ken Lewis (now retired), and former CFO Joseph Prince (since stepped down). Cuomo alleges the defendants misled both the public and government actors as regards the Merrill acquisition. Via telephone with the WSJ (NYTimes?), Cuomo remarked, "We believe bank management understated the Merrill Lynch losses to shareholders to get shareholders to approve the deal then [turned around and] overstated their ability to terminate the agreement to get $20 billion from [the] federal government. That is just fraud." Cuomo continued, alleging BofA "exploited" the economic fear in 2008 and "defrauded" the taxpayers. Uber interestingly, Neil Barofsky, Special Inspector General for TARP, was also on the call.

BofA has denied the allegations and indicated it will mount a defense.

Copies of the SEC settlement proposal and NYAG complaint are here. The story is being reported everywhere, apparently first by the NYTimes, but also at AmLaw, Bloomberg, and the WSJ. This blawg's discussion of the BofA matter is here.

Image credit: BofA.

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