(CN) – A federal judge in New York questioned the proposed $33 million settlement between the Securities and Exchange Commission and Bank of America over billions in bonuses paid to Merrill Lynch executives, saying it was “puzzling” that the SEC chose not to bring charges over allegedly misleading proxy statements.
The SEC and Bank of America had been ordered to answer questions by Monday, and both did so. They joined forces in asking U.S. District Judge Jed Rakoff to approve their proposed settlement involving $3.6 billion in executive bonuses.
The SEC accused Bank of America of failing to disclose to shareholders an agreement to allow Merrill Lynch to pay discretionary bonuses up to $5.8 billion, while falsely representing that no such bonuses would be paid without Bank of America’s consent. Merrill Lynch ultimately ended up paying $3.6 billion in controversial executive bonuses.
Rakoff said the submissions from both parties raised “additional issues,” including the SEC’s “puzzling” decision not to press charges over the proxy statements.
In its brief, the SEC claimed that it couldn’t investigate Bank of America executives’ culpability because they relied on lawyers’ advice. It also claimed it didn’t have a case unless the bank revealed contents of private discussions with attorneys, and the bank hadn’t waived attorney-client privilege.
Rakoff challenged this statement, saying it appeared “at war with common sense.”
“It would seem that all a corporate officer who has produced a false proxy statement need offer by way of defense is that he or she relied on counsel,” he wrote. “If the company does not waive the privilege, the assertion will never be tested, and the culpability of both the corporate officer and the company counsel will remain beyond scrutiny.
“It also leaves open the question of whether, if it was actually the lawyers who made the decisions that resulted in a false proxy statement, they should be held legally responsible.”
He further questioned the SEC’s decision to seek only a $33 million settlement that would then be paid by shareholders “and arguably … U.S. taxpayers.”
And he wanted to know why the bank agreed to the settlement while still maintaining innocence, and wondered if it was to “curry favor” with the SEC.
The SEC and Bank of America became unlikely allies Monday in urging Rakoff to approve their proposed settlement.
“The proposed settlement is fair, reasonable, adequate and squarely in the public interest,” the SEC wrote in a brief to Rakoff, who blocked the $50 billion merger two weeks ago and asked the parties to submit more details of the agreement.
Without admitting any guilt, Bank of America also pushed for the deal’s approval.
“If this case were to be litigated to judgment, Bank of America would have powerful and successful defenses,” the bank wrote in its response.
“Nevertheless, Bank of America determined to reach a settlement with the SEC, so that the company would not face the unnecessary distraction of a protracted dispute with one of its principal regulators at a time of uncertain and difficult market conditions.”
Rakoff ordered both parties to resubmit answers by Sept. 9.