(CN) – A federal judge in Manhattan barred Bank of America from using media reports to defend allegations that it tried to hide billions of dollars in bonuses to Merrill Lynch executives while accepting a $45 billion taxpayer bailout.
The Securities and Exchange Commission accused the bank of lying to investors about the $3.6 billion in bonuses paid to Merrill Lynch executives just before the companies’ $50 billion merger in 2008.
Bank of America allegedly authorized Merrill Lynch to pay up to $5.8 billion in discretionary year-end bonuses, but issued a proxy statement telling shareholders that it had agreed not to pay the bonuses without the bank’s consent.
The bank argued that shareholders knew about the bonuses through the media reports.
U.S. District Judge Jed Rakoff pointed out that the proxy statements explicitly told shareholders to ignore the media reports.
“One must ask what a reasonable investor would reasonably consider the total mix of information in this case,” Rakoff wrote. “The answer is that since the bank itself warned investors not to rely on the media, it would be unreasonable for a shareholder to consider the media pronouncements to be part of the relevant mix of information.
“In effect, the bank is arguing that, even though it expressly warned its shareholders to disregard the media, it can now defend itself by asserting that a reasonable shareholder would have disregarded these warnings and, by consulting the media, perceived that the bank’s alleged lies were immaterial,” the judge continued.
“Even a zealous advocate might perceive that such an argument hints at hypocrisy.”
Rakoff excluded from evidence the media reports and testimony based on them.
In September of last year, Rakoff rejected as “worse than pointless” a proposed $33 million settlement over the controversial bonuses, saying it “further victimizes the victims” by making shareholders pay for executives’ alleged lies.
He later allowed the bank to show the SEC the legal advice it received before the merger.