A judge has ordered a hearing on a $33 million proposed settlement between the Securities and Exchange Commission and Bank of America Corp. over executive bonuses.
Bank of America had agreed earlier this week to pay the penalty to settle government charges that it misled investors about Merrill Lynch's plans to pay bonuses to its executives.
But the settlement is subject to court approval, and Judge Jed S. Rakoff declined to grant it pending a hearing on Monday.
In a statement late Wednesday, Rakoff said the proposed settlement "would leave uncertain the truth of the very serious allegations made in the complaint."
In seeking approval to buy Merrill, Bank of America told investors that Merrill would not pay year-end bonuses without Bank of America's consent. But in its complaint filed with the U.S. District Court for the Southern District of New York, the SEC said Bank of America had already authorized New York-based Merrill to pay up to $5.8 billion in bonuses and didn't share that information with shareholders.
That meant a statement Bank of America mailed to 283,000 shareholders of both companies about the Merrill deal "materially false and misleading," the SEC contends.
Bank of America agreed on Monday to settle the charges without admitting or denying the allegations.
Bank of America, along with Citigroup Inc. and insurance giant American International Group Inc., is among the largest recipients of government aid. It has received $45 billion from the federal $700 billion bank rescue program.
In his statement Wednesday, the judge said the proposed settlement between Bank of America and the SEC "in no way specifies the basis for the $33 million figure or whether any of this money is derived directly or indirectly" from public funds advanced to Bank of America as part of its bail out.
It is not the first time Rakoff has refused to rubber-stamp a major SEC settlement. In 2003, he put the brakes on a proposed $500 million settlement with WorldCom Inc. for massive accounting fraud.
Lawyers for WorldCom and the SEC pleaded with Rakoff to sign off on the fine. He asked about options including giving shareholders a new stake in the company, called MCI once it emerged from bankruptcy.
WorldCom eventually paid $750 million in cash to the SEC and set aside MCI stock for former WorldCom investors.
Spokesmen for both the SEC and Bank of America said their parties are looking forward to appearing before the court and addressing any questions the judge may have regarding the settlement.
Charlotte, N.C.-based Bank of America agreed to purchase Merrill in a deal that was hastily arranged Sept. 13-14, 2008, the same weekend that Lehman Brothers collapsed. Bank of America CEO Ken Lewis and Merrill Lynch CEO John Thain announced the deal Sept. 15.
The acquisition came as Lehman's collapse caused panic in the financial markets and investment banks such as Merrill faced billions of losses on soured mortgage investments.
Merrill ended up paying $3.6 billion in bonuses in 2008, the SEC said, even though it lost $27.6 billion that year, a record for the firm. The bonuses amount to nearly 12 percent of the $50 billion that Bank of America paid for Merrill.
The acquisition and bonus payments have also caused the bank internal issues and has angered some shareholders. Lewis' management ability has been questioned and shareholders stripped him of his chairman's title in April.
However, Richard Bove of Rochdale Research said the Merrill merger has actually benefited the bank.
"The stock price is up from the time of the merger," Bove wrote in a research note Thursday. "Net conclusion, Bank of America's shareholders benefited from the deal."