June 29, 2010 – Trial date for SEC v. BofA, Part II

I have to admit that when news hit last month of the SEC's second amended complaint - and then second independent complaint - I was content at the time to read the headlines and news reporting alone. In addition to alleging BofA violated federal securities laws by not properly disclosing the Merrill bonus agreement to BofA shareholders prior to the proxy vote on the merger, the SEC filed new allegations that BofA violated securities laws by not properly disclosing Merrill 4Q08 losses to its shareholders prior to the same vote. The usual remedies are sought: injunction and civil penalty.

A short article ran last week in AmLaw, however, that brought me back to the SEC complaint itself. The gist: the agency's arguments are incompatible and not compellingly strung together. The critique argues that despite S.D.N.Y. Judge Rakoff insisting on accountability by individuals, the SEC continues to chase the corporation itself, and has failed to make any allegations against any BofA officers, directors, or legal counsel. The article ironically states that a corporation is nothing but a vehicle at the behest of individuals. Although the SEC did describe BofA's officers' and counsels' decisions in the complaint as "negligent" and "erroneous," the article points out that such is not unlawful. Further, the SEC's allegations in essence describe Wachtell Lipton as an incompetent advisor. A notion that is infrequently heard, and one that neither Wachtell or BofA has advanced as a matter of defense.

It was an interesting point, and so I went back into the complaints (the second independent complaint is virtually a cut/paste from the material in the second amended complaint). The timeline alleged is really interesting, and the SEC even paints the BofA officers and directors in a substantially more positive light than the media did over the course of 2009. (I am actually sitting here feeling a little bit bad for Ken Lewis.)

September 13th and 14th, 2008. The proverbial financial sky was falling, and BofA and Merrill were in discussion over a possible merger. It was unknown at this time the enormous 4Q08 losses Merrill would sustain (and in all Stef fairness, reasonably so).

September 15th. The parties announced successful negotiations had produced a merger agreement. The deal was valued at $50 billion. BofA would issue shares to Merrill shareholders, issuing 0.8595 BofA shares of common stock for every share of Merrill common stock. The exchange represented a $29 value for each Merrill share, which was a 70% premium from the trading price on Sept. 14th.

October 16th. Merrill issued a 10-Q and announced a net loss of $5.2 billion for 3Q08. The explanatory notes indicated a substantial write-down for selling CDOs backed by non-prime residential mortgages and the terminating related guarantees. The market responded positively to the news, anticipating a net income in 4Q08; the SEC alleges BofA management rode the same optimism wave in response to the news.

November 3rd. BofA and Merrill filed a joint proxy statement, principally for the purpose of soliciting shareholder votes to approve the merger. Separate shareholder meetings were planned for December 5th. BofA also filed a registration statement on Form S-4 to register the issuance of BofA shares to Merrill shareholders, per the merger agreement.

November 12th. Since the Sept. 15th merger announcement, BofA was kept abreast of Merrill's performance. On Nov. 12th Merrill gave BofA an internal forecast report estimating a 4Q08 net loss of $5.4 billion. BofA consulted with in-house and outside counsel as to whether the loss rose to the level of a public disclosure. Both counsel indicated a disclosure was not necessary, reasoning the proxy statement and recent filings describing the current economic environment and its potential impact on Merrill constituted sufficient disclosure. When BofA disclosed to Merrill that a public disclosure may be forthcoming, Merrill also agreed with in-house and outside counsel.

December 3rd. Merrill gave BofA an updated internal forecast report estimating a $6.4 billion net loss for October and November; the 4Q08 net loss was anticipated to be over $7 billion. BofA again consulted with counsel, and counsel again advised that a disclosure was not necessary, reasoning the loss was within the historical range of previous Merrill losses.

December 5th. Without new information, BofA shareholders believed no fundamental changes had occurred since the terms of the agreement were reached between Sept. 13th and 14th; the Merrill acquisition was approved by shareholder vote.

Second Week of December. Merrill gave BofA an updated internal forecast reporting net loss of over $12 billion for 4Q08. BofA considered forfeiting the acquisition altogether under merger agreement provisions of a material adverse change ("MAC").

January 1st, 2009. The merger closed.

January 6th. BofA publicly disclosed that Merrill was subject to a 4Q08 net loss of $15.3 billion. BofA also disclosed it received $20 billion in TARP funds to complete the acquisition.

The SEC alleges BofA failed to make proper disclosure of the 4Q08 Merrill losses in both the joint proxy statement and the Form S-4. The SEC argues the proxy should have contained updated details of the value of the Merrill merger so that shareholders would have been able to adequately consider the merger vote. The SEC argues the Form S-4 required BofA to publicly disclose any material changes to Merrill's affairs that were not otherwise reflected in other filings, and that the form also required BofA to update the shareholders prior to the proxy vote.

Image credit: Bank of America.

Executive Compensation Re-Regulation: Congress, the Federal Reserve, and the Securities and Exchange Commission

A team I have been working with just fed updates on a research document to some journals >> I scored a new section on executive compensation re-regulation! Each piece of re-regulation described below focuses on localized risk reducing initiatives in the name of the greater financial system.

Congress

The Corporate and Financial Institutional Compensation Fairness Act of 2009. Introduced by Representative Barney Frank (D-MA) in July, and out of Committee and the House Floor that same month. It is currently sitting in the Senate Committee on Banking, Housing, and Urban Affairs. (Most of the commentary I read suggested it would be dealt with there in the Fall of 2009, however …).

The bill amends the '34 Act to give shareholders a nonbinding advisory vote on all issues of executive compensation. Interesting trick here: institutional investment managers that cast such votes are required to publicly disclose how they voted – each year. There is also some discussion about compensation committee members – rules preventing conflicts of interest (so a prohibition on taking any sort of consulting or advisory fees from the issuer). Second interesting trick: the bill directs nearly a dozen federal regulators to formally convene and create new compensation and disclosure rules. One piece of construction guidance offered in the bill: individuals' specific income should not be disclosed. There you go, Tea Partiers. Here is the text of the bill.

The Federal Reserve ("Fed")

The Fed has issued Proposed Guidance on Sound Incentive Compensation Practices. I was deceived when I first opened the Federal Register; it sounded aspirational, at best. On the contrary – I counted the number of times the Fed threatened a poor supervisory rating or an enforcement action for failing to remedy a deficiency - twice - and the number of times the Fed directed immediate effort by banking organizations to come into compliance – three.

Every banking organization under the Fed's supervision is required to come into compliance with the guidance. The guidance is applicable to both executive employees and lower-level employees; it is more targeted towards any employee whose work responsibilities expose the employer bank organization – and again, the larger financial banking system as a whole – to risk. Interesting here: rather than establishing one rule for twenty different types of banking organizations, the guidance states several principles the Fed wants all of the banking organizations to come into compliance with; how any one bank abides by the principles is self-determined. The principles focus on managing the relationship between incentive compensation and employee risk-taking. Broadly, incentive packages should not encourage employees to risk-take beyond the employer banking organization's internal ability to identify, manage, and support that risk. As a means of collecting best practices (maybe a structural means of pushing compliance?), the Fed has created a scheme to supervise compliance. There are two tracks: one for large complex banking organizations ("LCBOs") and a second for smaller, less structurally complicated banking organizations. LCBOs are expected to offer a compensation plan to the Fed; smaller organizations will be assessed on compliance as a part of their annual risk examination process. You can read the text of the Fed's guidance in the Federal Register here.

The Securities and Exchange Commission ("SEC")

In an effort to better enable investors trying to identify the internal risk assumption and reward of a company, the SEC has adopted amendments regarding the disclosure of all employees' compensation. The new disclosure rules are effective February 28, 2010.

Companies are expected to disclose compensation practices that create the risk of a "reasonably likely" "material adverse" effect on the company. Companies are in fact to list situations occurring with their pay practices and among their employees that illustrate when a compensation practice does in fact create a "reasonably likely" risk of "material adverse" effect. (It appears there was a give-and-take during the comment period on the language.) Stef commentary on the effectiveness of the forthcoming disclosure: the list is explicitly non-exhaustive … The disclosure will be made in a new paragraph in Item 402 of Regulation S-K.

Also as regards company disclosure of stock and option grants in the Summary Compensation and Director Compensation Table – use the aggregate fair value grant date and footnote performance awards to disclose an award's maximum value.

(The SEC also voted to approve amendments: creating greater transparency for investors in determining conflicts of interest as regards compensation consultants; and a variety of disclosures regarding the board of directors, as regards nominee and director qualifications, the board's diversity, and the board's structural leadership.)

The final version of the SEC's amendments can be found here.

Image credit: SEC.

SEC Shareholder Director Nomination Proposal: Rule 14a-11

I’ve actually had this post in outline form on my desktop for weeks now …Thank god for Thanksgiving and down-time!

The Securities and Exchange Commission (“SEC”) deferred its decision to expand shareholder (“s/h”) board nomination rights until 2010. Chairwoman Shapiro wanted to review the hundreds of comments that were submitted regarding the proposal. Recall the comment period elicited joint letters from both sides of the aisle, BigLaw defense and plaintiff securities firms.

The proposal is available here, and I wanted to share some of what I read (not ironically, what has generated the most discussion). Broadly speaking, the proposal would allow shareholders greater access to a company’s board. Specifically, the SEC proposes a new rule, Exchange Act Rule 14a-11, that would require a company to include in its proxy materials shareholder nominees for director. Any state law, articles of incorporation, or corporate by-laws that disallow shareholders to nominate directors would supersede the proposed rule. The rule is not intended to apply to shareholders seeking either control of the company or possession of “more than a limited number” of director seats. Refer infra. discussion for clarification of what “more than a limited number ” means.

The SEC theme is fortifying existing shareholder rights. Proposed rule 14a-11, for example, is to remedy what the SEC identifies as an obstacle to a s/h’s right to nominate and elect the board of directors. That being, shareholder nominees float the expense to present their nomination to the shareholders at large for purposes of voting. Board nominees, on the other hand, are simply listed in the company’s proxy materials, and therefore do not have to finance the expense.

Ownership Floors

In an effort to address contra arguments (cost and disruption to the company), the SEC has proposed an eligibility requirement to leverage 14a-11. There is a minimum ownership threshold that must be met by the nominating shareholder or the shareholder group (“shareholder(s)"). The breakdown:

∙ 1% - For large accelerated filers, and registered investment companies with net assets of $700 million or more (company type and size, as defined in Exchange Act Rule 12b2).
∙ 3% - For accelerated filers, and registered investment companies with assets between $75 million and $700 million.
∙ 5% - For non-accelerated filers, and registered investment companies with assets less than $75 million.

These percentages are beneficial ownership as of the time of s/h notice of the vote, and as a percentage of the company’s securities entitled to be voted on at the time of the vote. Further, shareholder(s) must have owned the shares for a minimum of one year preceding the notice, and intend to continue to do so up until the vote in fact occurs.

Disclosures to SEC

Shareholder(s) must also provide notice to the SEC of their intention to include a nominee in the company’s proxy materials; Schedule 14N. This same disclosure would also be made to the company, and is manifold. It contains information such as the percentage of securities held by the nominating shareholder(s), the length of the ownership and the intent to continue to hold the securities until the vote, as well as “certification” that the shareholder(s) do not intend to change control of the company or obtain “more than a limited number” of seats.

Nominating shareholder(s) would also attest that the nominee satisfies standards of director independence as required by a national securities exchange or association, or for a registered investment company, that the nominee was not an “interested person” per § 2(a)(19) of the Investment Company Act.

Further, nominating shareholder(s) would attest that there is no agreement between the nominating group and the company as regards the nominee (Ie., once elected, the director would block certain issues from moving forward). Unsuccessful negotiations with the nominating committee of the company to have the candidate included on the company's proxy card as a management nominee, or negotiations regarding disclosure of the shareholder nominee, do not count.

“More than a limited number”

This limited number is either one nominee, or a quarter of the total possible director positions on a board; whichever is greater. If shareholder(s) successfully nominate and elect 25% of a board’s directors, and those directors' terms overlap with the next nomination and election process, the company is not required to include any further shareholder nominees in the impending proxy materials (so as to avoid greater than 25% of the board being composed of shareholder nominees). Further – as regards which shareholders’ nominees will get priority – first in line is first in time. 14a-11(d)(3).

Closing

As a threshold matter, inclusion of shareholder(s) nominee in the company’s proxy materials would not prohibit other solicitation materials that currently exist and are proper (SEC Ie., a website).

Since an SEC decision on the matter has been deferred until 2010, if approved, Rule 14a-11 would not be applicable during the 2010 proxy season.

View full post and comment string ...

EVERYTHING Bank of America produced to Cuomo and Congress goes to plaintiffs in the S.D.N.Y.

Bad week for BofA. For several reasons, but in the case of this post: S.D.N.Y. Judge Denny Chin ruled earlier this week that plaintiffs proceeding before him against BofA are entitled to whatever documents BofA has produced to date.

To be clear, this includes the otherwise privileged documents that BofA agreed to produce to Cuomo, the SEC, Congress ... It is speculated the protective order those documents were produced under (and was conceivably requested to prohibit any other parties from having access to these documents) can be construed as protecting from protection only those documents not already produced or requested by Cuomo, the SEC, Congress ...

Recall: a separate plaintiff's suit is proceeding against BofA in the Delaware Chancery Court, and earlier this month was awarded the right to request discovery of the same otherwise privileged documents.

Chin's order is here. Rakoff's protective order is here. BofA's litigation settlement allocation is here (joking. not really).

Breaking BofA UPDATE: Unlicensed Counsel

Although it doesn't go to the substance of the various litigation BofA is juggling, it is scandalous nonetheless (and BofA is sort of like Britney Spears now: everything is newsworthy). Corporate Counsel is reporting this morning that in middle of the Merrill acquisition and merger, Brian Moynihan served as an interim General Counsel for BofA for a whole 37 days. The raging gossip: for 8 of those days, Moynihan had an inactive license.

Interestingly, although I received the news this morning via Corporate Counsel and AmLawDaily, neither link is working ... (cease and desist letter?). So you can check out the story in greater detail at The Business Insider, The Boston Globe, or The Telegraph.

BofA Updates

Because you knew somewhere among the summary updates I would insert BofA news, right?

I have written here before of the “pressure” BofA may have put on federal actors preceding conclusion of the Merrill acquisition ("pressure" that is argued to have forced $20 billion in federal support for the transaction). Remember: recent revelations are a result of documents previously protected by a/c privilege being produced to investigators. Documents apparently show outside counsel turning to his left (BofA) to indicate one opinion of whether a material adverse change ("MAC") triggered an escape clause in the Merrill transaction, and then turning to his right (federal actors) and indicating a polar opposite opinion. (Recall, the MAC discussed here is the enormous 4Q08 Merrill losses). It's not looking good - the contrary opinions were literally given hours of one another.

In a related story, though not as regards the "pressure" issue, WSJ ran an interesting article on Judge Rakoff. See also (Rakoff is the S.D.N.Y. judge the SEC case against BofA is pending in front of; trial date slated for March 01, 2010). The inside trading case involving Galleon Management founder Raj Rajaratnam is also before the Good Judge. Pundits speculate this will be a second high-profile opportunity for Rakoff to skewer the SEC and its litigation strategy.

Financial Stability and Improvement Act of 2009

The Financial Stability and Improvement Act of 2009, otherwise known as draft legislation for the “Too Big Too Fail” institutions, was proudly unveiled last week by Treasury and the House Financial Services Committee. Here’s the meat of what it proposes:

Creation of another (?!) Council, this one the Financial Services Oversight Council, which first identifies financial companies and activities that pose a threat to systemic stability, and then monitors them. No really – without other elaboration as to how to identify or effectively achieve any of that, this is what the draft legislation proposes. This Council, evidently, has a massive data-gathering responsibility (data generated by various federal financial agencies), and has the ability to name concerns for federal action.

A fairly aggressive approach to holding company regulation. Specifically, the draft legislation removes Gramm-Leach-Bliley Act restrictions on federal power (specifically, this would allow various federal agencies to regulate). Background: Gramm-Leach-Bliley, alternatively known as the Financial Services Modernization Act of 1999, rolled back Glass-Steagall (1933) in part. But a big part. Glass-Steagull said investment banks are investment banks, and commercial banks are commercial banks, and insurance companies – very big surprise – are insurance companies >> keep your buckets separate. Gramm-Leach-Bliley, among other things, allowed these separate actors to consolidate. So one bank could offer all variety of financial services, and voila, usher in the dawn of the financial service industry.

• Following presumed enactment, no further commercial companies will be allowed to own banks, industrial loan companies ("ILCs"), or any specialty bank charters.
• Thrift holding companies would be subject to fed supervision, and such charters would be reserved for entities focused on mortgage lending.

The draft legislation has a very federal bankruptcy code-type idea. The draft legislation contains language that provides for wind-down activities. Specifically, “that shareholders and unsecured creditors bear the losses, not taxpayers.” The draft legislation delegates the FDIC with this wind-down responsibility, and costs are to be provided for by the failed company (presumably priority above the creditors; *yay* lawyer drafters). VERY INTERESTING: if the company actually does not have enough money to wind-down, a “Resolution Fund” will pay the deficit. This fund is created by “assessments on all large financial firms” (later defined as companies with assets of $10 billion or more).

Not as interesting: there are new organization models; ie., the Treasury Secretary must approve any Fed effort to provide liquidity; and banking regulators and the SEC have to come together to write rules requiring creditors (or securitizers where the loan was not originated by the creditor) to retain 5-10+ percent of any credit risk associated with loans for securitization (is it me, or was that the rule right there?).

Investor Protection Act of 2009

Because last week was hot for re-regulation, I promised a summary of what I saw. So here goes ...

The Investor Protection Act of 2009 was proposed by Treasury in July, and will probably be voted out of the House Committee on Financial Services this week for a House floor vote later this fall. Some of the more rockstar aspects of this bill include:

Should advisers and broker-dealers owe the same fiduciary duty to investors? Currently, investment advisers must act in the best interests of the client; broker-dealers, on the other hand, are only legally required to provide a suitable product for investment. Keep in mind the distinction here: investment advisers offer financial advice to individuals or asset management to funds or corporations; broker-dealers actually trade shares to benefit their own accounts (whether as an agent for a client or as a principal on their own behalf).

The bill creates new SEC powers, in two ways. First, it amends the Investment Company Act of 1940 to require mutual funds to disclose more information to investors. Second, the bill also creates an Investor Advisory Committee that represents investor interests within the SEC.

Also-also: there are whistle-blower provisions that offer protections and compensations; and investment advisory firms with assets of less than $100 million will forthwith be regulated by state securities agencies.

UPDATE (11.05.2009, 145p): The legislation was voted out of Committee yesterday (11/04) and is headed to the House floor for a vote. Controversial meat on that bone is the Garrett-Adler amendment that was successfully attached to the bill. The amendment permanently exempts small businesses from a requirement that outside auditors review a company's internal control and environment (as regards issues of accounting, fraud, and waste). Small business is defined as companies with a market value less than $75 million. This will exempt approximately half of all publicly-traded companies. Brief background: the outside auditor requirement exists as part of the post-Enron Sarbanes-Oxley ("SOX") regulation. Historically, smaller firms have been exempted from the auditor requirement due to cost concerns.

Ken Lewis takes no salary or bonus for 2009!

No worries - Dude takes home over $100 million in a retirement package regardless (which conveniently for him, was arranged before BofA received federal monies and came under the supervision of Treasury's Special Master for TARP Executive Compensation, Kenneth Feinberg).

I posted earlier today about Feinberg and AIG, but Feinberg has struck again: he has knocked Lewis' $1.5 million base pay to zero - and Lewis has agreed. Lewis, in fact, will have to repay $1 million back to BofA for salary already received this year.

Hat-tip: WSJ.

Photo credit: Dealbreaker.

New BofA General Counsel: Edward O'Keefe

As an introductory remark, recall BofA is facing investigations/suits from NY, OH, and NC attorney generals, the SEC and DOJ/FBI, and almost two dozen shareholder suits. Dude - if he can juggle this, that's a lot of lateral value, right?

Corporate Counsel has an interesting post today about the new GC, and who he's reporting to (evidently to the Chief Administrative Officer [HR-ish] and not to the CEO; reported as unusual). Of course there's some discussion of how this indirect reporting method may have contributed the current BofA dramas. Check it out here.

Internal BofA Emails Starting to Hit the Press (Contemporaneous to slashing s/h dividends to 1¢ per share)

Apart from the shareholder quip, I doubt this exchange is actionable, but given BofA's recent waive of privilege and subsequent (over)production of documents to various federal and state bodies, news reports like this are going to be rampant over the next several months. FWIW - enjoy!

Between BofA Directors Chad Gifford ("CG") and Thomas May ("TM") the day BofA cut dividends to 1¢ per share; emphasis in original.

CG: Concentrate on the phone!!!

TM: Screw You.

CG: Unfortunately, it's screw the shareholders!!

TM: No trail.

CG: Only stated in the context of a horrible economy!!! Will effect [sic] everyone ...

TM: Good comeback, [expletive].

CG: Amaaazing ...

Hat-tip: Boston Globe.

BofA Board Waives Privilege: produces documents otherwise protected by attorney-client privilege

The WSJ reported last night that BofA's board voted Friday to waive it's attorney-client privilege, producing documents to various moving parties regarding the Merrill merger. Specifically, the documents produced will be between BofA and outside counsel regarding Merrill 4Q08 losses, the Merrill 2008 bonuses, and the manner and extent those bonuses would be publicly disclosed.

I have followed the BofA and Merrill matter closely (See e.g. here and here). Recall briefly that as various government and plaintiff investigations proceeded, BofA executives maintained they executed the Merrill merger and Merrill bonus disclosure per the advice of outside counsel. Then when asked what counsel advised, BofA executives indicated such information was privileged. BofA maintains they have done nothing wrong.

Big Law implicated in the matter? BofA outside counsel during the merger was Wachtell; Merrill counsel during the merger was Shearman Sterling. Current BofA counsel, as regards the various investigations into the Merrill merger, include Cleary Gottlieb and Paul Weiss.

BofA for Today: UPDATES

BofA is simply the gift that keeps on giving.

The Board's move to replace Lewis as CEO is growing more problematic than anticipated, and creating some waves. There are concerns that names being floated are not worthy ("tainted" by the Merrill merger decisions).

Ken Lewis' retirement pay will comfortably total over $100 million, in accrued benefits and deferred compensation (including stock). Despite Lewis' performance up to the Merrill merger (that largely made BofA the titan it is today), people are clamouring for Czar Feinberg to veto that figure. No comment from Feinberg's office.

On top of this: there are rumblings about what can Lewis was advised by his GC at the time of the Merrill merger, and if he actually ignored the counsel. I suspect this rumour is going to grow between now and the time of the SEC trial ...

Which, by the way, has been moved to March and is now a jury trial.

Regarding the various shareholder matters? Earlier this week, a major BofA shareholder filed a document with the SEC making various demands on the BofA board (GC should talk, and start an internal investigation by an other outside counsel). Separately, a motion to dismiss a shareholder suit is occurring next week in Delaware (a request has been filed with the court to webcast the matter).

Maloney & Porcelli Fake Receipt Generator, Stoneridge, and Scheme Liability

How does an idea like this get out of a marketing department?

The WSJ reported yesterday that Maloney & Porcelli's steakhouse has created an online receipt generator to expense otherwise unexpensable items. So let's say you spend $150 on a steak lunch (or a mani, pedi, and massage); largely unexpensable, right? But the steakhouse's website allows you to enter the $150 amount and receive a cash receipt that details an expensable item (offices supplies, cab fare, etc.). Seriously - check it out here. There's no charge for a fraudulent receipt: you merely go to the website, enter an amount, and a pdf receipt is generated for you (with aesthetic elements including frayed edges and slight discoloration). If the amount you entered is particularly large, you will receive several fraudulently generated receipts that total your amount.

The restaurant reports that in one week, over 88,000 fake receipts have been downloaded. An ad executive and webmaster interviewed for the article were represented as blase regarding legal culpability. I find that danerously short-sighted, but more honestly was intriqued by the larger context of this sort of PR stunt. (I have been debating a post about last year's Stoneridge decision, the proposed legislation to overturn it and institute scheme liability, and the varying subsequent lower court treatments of the decision. Seeing this article has cemented my intent to write on the matter, although I think I will break it up into several posts. Stay tuned!).

You better check the receipt generator out now >> Maloney & Porcelli has already received several cease-and-desist orders from franchises misrepresented on the fraudulent receipts, and I suspect more are on the way ...

Photo credit: "Maloney & Porcelli Expense Report Generator."

BofA UPDATES: Emergency CEO and Some Federal Pressure (but not to hide the bonuses)

Good Morning! Two quick notes, reported across the media outlets yesterday afternoon and this morning:

Preceding Ken Lewis' signal for early retirement, the company created a committee to name an emergency CEO. Post-Lewis-announcement, the efforts have been accelerated and a contingency plan is expected to be submitted to the board for approval this week. This contingency plan is also expected to be submitted to government regulators for approval (BofA received TARP funds). Pending both approvals, the plan would only come into affect if the current legal drama forces Lewis to step down even earlier than announced.

Separately, an other BofA committee is investigating long-term replacements for the CEO. The final list will also be submitted to the board and the federal government for approval.

And finally, TARP Special Inspector General Neil Barofsky was also investigating the matter of whether the federal government unduly pressured BofA into the Merrill deal. Barofsky concluded that while Fed and Treasury pressure was applied to BofA to complete the deal, federal officials did not advise withholding public disclosure of the Merrill bonuses.

*Happy*Tuesday*

Can Ken Lewis take the fall for all of this? Bank of America.

It’s hard to find television this entertaining; I mean, really.

Ken Lewis announced his resignation as CEO of BofA on Tuesday. Although sometime in 2010* is indicated as his end-date, there is no conclusive date yet. Too, no successor has been named (although a CEO Committee is being formed today). The Board certainly must have been anticipating this, as they only met last week to discuss the escalating legal issues facing the company – and Lewis - as a Congressional deadline for more information came and went with a tardy BofA response (they’re submitting more documents to the House Comm. on Oversight and Gov. Reform). (Teaser: commentators at CorporateCounsel actually think the federal government didn’t bully BofA into the merger, but that BofA in fact bullied the federal government).

Congress isn’t the only dog in this park, though. There are a number of state suits moving ahead against BofA, including NYAG Cuomo, NCAG Cooper, and OHAG Cordray (filed in S.D.N.Y. and moving quickly). There are a number of federal investigations moving against BofA, including the SEC and an alleged DOJ and FBI criminal investigation. There is also (and what I suspect to be only the beginning) a number of civil suits: including the dead-in-the-water suit seeking 1,784 billion trillion in damages, the class action by Wolf Popper, the shareholder suit in Kansas …

Had enough?

As regards the SEC matter, both the government and BofA filed a case management plan last week that stipulates a February trial date. BofA also submitted trial filings last Friday, available here via AmLawDaily (their response remains consistent throughout the several briefs in the matter: we did nothing wrong). Apart from a trial, commentators have speculated the parties could submit a new settlement to Judge Rakoff, appeal Rakoff’s September decision, or the SEC could either drop the complaint altogether or proceed with an administrative hearing.

*UPDATE added 10/02/2009 at 2pm: Lewis originally intended to continue as CEO until the end of 2010, but is now apparent he will hold his executive position only until the end of 2009.

Photo credit: AFP/Getty Images via WSJ.

Navel Gazing and UPDATE: Executive Compensation and Financial Markets

So I’ll admit my own distraction for the last week, but was surprised that when I tuned-in again, the issues of executive compensation and market regulation had been subject to significant movement. Seriously: this is why people are afraid to take vacations.

The Consumer Financial Protection Agency (“CFPA”) being proposed by the Obama Administration (discussed earlier here) has taken some serious heat >> members of the President’s own party are offering competing proposals that in fact contain no mention of CFPA at all. Well, sort of … in place of creating a new federal regulatory structure for financial products marketed to consumers, Representative Walt Minnick (D – Idaho) has proposed having existing state and federal regulators work with one another under a Consumer Financial Protection Council (“CFPC”). Rumor also has it that once supportive House Financial Services Committee Chairman Barney Frank (D – Mass.) has indicated that the final bill will not contain the “plain vanilla mandate;” recall, under the CFPA, the government would create standard financial products that would be required to be offered in tandem with specialty products banks and firms offered to consumers. The House Committee meets today at 10am to continue hearings on the matter; a webcast is available from the House site here.

The SEC is creating a new division of Risk, Strategy and Financial Innovation. The new division will advise the commission on how new developments, products, and trends may affect the financial market and systemic risk. The division actually pulls together functions across existing Commission divisions, including the Office of Economic Analysis and the Office of Risk Assessment.

Microsoft’s Board of Directors approved a shareholder say-on-pay proposal, giving its shareholders an advisory vote on executive compensation. The first vote will happen at this year’s shareholder meeting on November 19th, and then occur again every three years after.

The Federal Reserve itself is moving to amend compensation practices, and is seeking to expand its regulatory reach regarding the compensation of nearly all bank employees. Caps are not being sought, but evidently the Fed is toying with different methods of how to curtail the amount of risk-taking employees throughout the bank take on behalf of consumers.

Glad the Fed thinks it can fix something, because every time you hear a bell ring, another American bank fails.

And our favourite main-man – Kenneth Feinberg the Pay Czar – has announced that within the next several weeks he will be disclosing some of the compensation revealed to him and approved by him. Rumour is Feinberg is looking to set some manner of precedent.

And precedent seems to be all we will be getting out of the recent G-20 meeting on the issue of executive compensation. Each of the world leaders in attendance affirmed their intent to reform executive compensation and capital requirements at banks, and then they each exchanged promise rings and caught the next flight home.

FWIW – a few of the headlines I found in my inbox over the course of last week. My continued obsession with Bank of America (“BofA”) of course continues, and has also been hot lately. BofA warrants its own post, though, so see you at lunch!

Photo credit: Anne Geddes, as portrayed by Pauline Kaill on Playle's Online Auction.

Who is Judge Rakoff of the S.D.N.Y.?

I had written this on one of my hand tablets to develop as a post later. In light of the continued BofA drama, I thought it would make an interesting and timely post. Et voilà: Glovin at Bloomberg beat me to it. Check it out: it's a interesting write-up.

BREAKING NEWS: Cuomo has subpoenaed five BofA directors

Within the last several minutes, both the WSJ and ABCNews is reporting that NYAG has served five BofA directors with a subpoena in Cuomo's ongoing investigation. An annonymous source, that sounds like it is on the NYAG side, has indicated questions will be asked regarding the Merrill acquisition, knowledge of Merrill 4Q losses and bonuses, and about whether there was federal pressure to go through with the deal. The source is alleged to report the NYAG's investigation will culminate in charges against several BofA executives in the coming weeks.

Previous blawg discussion on the continuing BofA/Merrill matter can be found here.

Holy Crap: Rakoff refuses to approve BofA settlement - trial in February?

Hot stuff! So-o hot; very hot. Despite both the SEC and BofA asking the Court in their briefs last week to approve the $33 million dollar settlement reached in August, the NYTimes blog Dealbook reported at lunch that Judge Rakoff has said “No.” The Opinion is here, but suffice it to know Rakoff focuses his attention on the BofA shareholder. Rakoff wonders how a settlement for acts committed against BofA shareholders is remedied by a payout by those same shareholders – ironically, where the BofA management who decided to pay are presumably the same BofA management who are alleged to have committed the acts. Rakoff acknowledges that deference is typically and appropriately shown to settlements achieved between parties, but then cites case law that empowers courts to scrutinize and deny them. Rakoff concludes the $33 million “proposed consent judgment is neither fair, nor reasonable, nor adequate.”

Have I mentioned how hot this is?

The Judge elaborates. It’s not fair because it smacks of injustice: why should the victims of the act pay the penalty? Rakoff even goes so far as to question, that if BofA executives were relying on counsel’s advice, why not have the attorneys pay the penalty? Even better, Rakoff calls out BofA for not providing the information the Judge asked for in August: “precisely how the proxy statement came to be prepared, exactly who made the relevant decisions as to what to include and not to include so far as the Merrill bonuses [are] concerned.” In a fn. on page seven, Rakoff’s language suggests he considers the $33 million trivial. Rakoff in fact characterizes the settlement as a “contrivance.”

Rakoff continues: the judgment is unreasonable (for all the reasons it is unfair, but also) because the arguments contained in the briefs don’t match the parties' actions. The Court cites an example: the settlement would close the matter, but the SEC maintains in one place it has the evidence to meet the mental element required by law, but in another place maintains it does not. More fn.s: did government coercion have anything to do with this? Why hasn’t the advice of counsel argument been fully tested? Rakoff then beats it home: the injunctive relief requested (that BofA cannot issue false proxies in the future) is a joke >> BofA maintains they did nothing wrong and so would be free to issue proxy statements identical to the one at the heart of this matter (thereby resolving nothing).

Rakoff’s inadequacy reasoning: $33 million in light of a multi-billion dollar merger (Aka., please?!).

We’re off to trial, Baby! Rakoff set a February 1, 2010 date and requested the Parties submit a jointly proposed Case Management Plan within a week.


Hat tip: Louise Story at NYTimes.