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SEC charges BofA of lying to investors over Merrill but settles

Bank of America’s story in the BofA-Merrill saga has always sounded dubious at best.  Ken Lewis has always claimed he was doing what was right by shareholders and America, that Gentle Ben and Hammering Hank coerced him into the Merrill deal, that Merrill’s CEO John Thain was not completely above board.

All of this should be looked at with great suspicion, especially in light of the SEC’s charges against BofA for lying to investors about Merrill’s bonuses.  The Washington Post reports:

The Securities and Exchange Commission on Monday charged Bank of America with lying to investors about its plan to pay billions of dollars in bonuses to employees of Merrill Lynch.

Bank of America, which bought the ailing investment bank this year, agreed to settle the charges and pay a $33 million penalty, according to the SEC. The company did not admit or deny wrongdoing.

The agency alleged that Bank of America violated securities law by telling investors in a November 2008 filing that bonuses would not be paid without its consent.

"In fact, Bank of America had already contractually authorized Merrill to pay up to $5.8 billion in discretionary bonuses to Merrill executives for 2008," the SEC said in a statement. "The disclosures in the proxy statement were rendered materially false and misleading by the existence of the prior undisclosed agreement allowing Merrill to pay billions of dollars in bonuses for 2008."

This case represents one of the highest profile instances so far of legal fallout from the financial crisis. The Bank of America settlement involves a company in which the U.S. government owns a large stake, having provided tens of billions of dollars in emergency relief.

Bank of America bought Merrill Lynch for $50 billion under heavy pressure from the U.S. government.

"Bank of America believes that the settlement, which it entered into without admitting or denying the SEC’s allegations, represents a constructive conclusion to this issue," said a Bank of America spokesman, Scott Silvestri. "This is an important step forward for Bank of America and allows us to focus our energies on enhancing stockholder value by continuing to execute our strategies for the long-term success of our business."

He would say that, wouldn’t he?  Let’s rewind a bit, shall we?  Lewis claimed that John Thain gave out bonuses to Merrill employees in an unauthorized way.  He fired Thain and made his name mud in public.  At the time, I said:

As for John Thain, the man has been pilloried publicly, in particular because of the bonus scandal and the office re-design.  But, let me ask you this: was BofA going to underpay its vaunted Merrill money-makers in a one-off bonus round and risk their exiting the company?  No.  If you went to a Fortune 500 company with a new CEO, what would you guess the average amount spent for office renovations would be?

Now we learn the truth: BofA may have authorized $5.8 billion in bonuses all along as I suspected.  BofA will now pay a penalty to avoid having to admit guilt or admitting the allegations. Whether they admit guilt, one should certainly be suspicious.

In my view, Ken Lewis seems to have been self-dealing and empire building throughout this. Clearly he saw Merrill as a jewel in the crown he has been building for years.  When the deal started to go pear shaped, he started pointing his finger at others. I do not see him looking out for his investors. Is anyone going to take the blame for this public relations disaster and black eye at BofA?  Will Ken Lewis resign?  Doubtful.

And it is pretty pathetic that Bank of America gets off with a mere slap on the wrist after the billions in money taxpayers have ponied up for that organization.  There should be absolutely no deal.  We deserve to know exactly what happened.  If BofA has a reasonable defense – fine.  If not, force wrongdoers to resign and suffer the legal ramifications.

But, of course, that’s not going to happen.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.