updated 8/11/2009 11:14:33 AM ET 2009-08-11T15:14:33

A federal judge said Monday he needs more information before he can decide whether to approve a $33 million settlement between Bank of America Corp. and the Securities and Exchange Commission over executive bonuses.

"I am concerned that we have not yet ferreted out all that the court needs to know," U.S. District Judge Jed Rakoff said at a hearing in New York Monday afternoon. Adding that he is looking for "the truth, not the spin," Rakoff ordered both sides to provide additional details to the court within the next two weeks.

Bank of America, without admitting or denying the allegations, agreed last week to pay the fine to settle charges that it misled investors about Merrill Lynch's plans to pay bonuses to executives even as it prepared to report billions in losses. Those losses affected Bank of America's bottom line after its takeover of the troubled investment bank was completed.

The SEC alleges that Bank of America promised its shareholders that Merrill would not pay year-end bonuses without getting the Charlotte, North Carolina-based bank's prior consent, but in fact had already given Merrill authorization to pay up to $5.8 billion in extra compensation.

In back-and-forth questioning, Rakoff probed the allegations, describing the SEC's filing as "a fairly uninformative, bare bones complaint." He asked SEC officials who exactly approved the year-end bonuses.

"Was this some sort of ghost that performed these actions?" Rakoff asked David Rosenfeld, the associate regional director in the SEC's New York office. "Or were there human beings who wrote these documents?"

Rosenfeld demurred, but Rakoff pressed on, asking if former Merrill CEO John Thain and Bank of America CEO Kenneth Lewis were responsible for the bonuses. Rosenfeld said that both men had been advised by their lawyers, but that Thain and Lewis had not been a focus of the SEC's investigation.

Another key issue centered on just how the SEC came up with the $33 million price tag for the settlement, and if that money would be paid out of the billions in federal aid that Bank of America has received.

Rosenfeld, speaking so softly at times that both Rakoff and a court reporter had to ask him to speak up, said the amount was "fair and reasonable," based on a limited number of prior cases. But Rakoff called it a "tiny, tiny fraction of what was disclosed," if in fact, Bank of America was not truthful with its shareholders.

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 government's $700 billion bank rescue program.

In a statement, Bank of America spokesman Scott Silvestri said that taxpayer money would not be used to pay the settlement. He also said that the SEC complaint does not allege that anyone intentionally did anything wrong.

Rosenfeld, in a statement, said the agency will continue to present the facts of the case as well as the additional information the judge has requested.

Both the SEC and Bank of America will submit additional paperwork by an Aug. 24 deadline. Each side will then have time to review the new materials, and the judge could then rule or order additional hearings.

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.

During the hearings Monday, Bank of America attorney Lewis Liman defended the bonuses. He said the average award amounted to $91,000, which he described as "not a lot of money," a point Rakoff quickly contested. Liman also said the bonuses were a "retention tool" needed to prevent employees from deflecting to competitors.

But Rakoff questioned the reality of such a threat, given the state of the financial industry.

"How many banks were hiring new people at this time?" he asked. "Or how many brokerage firms, assuming any were left, were hiring at this time?"

The acquisition and bonus payments have caused Bank of America internal issues and angered some shareholders. Lewis' management ability has been questioned and shareholders stripped him of his chairman's title in April.

For the SEC, the outcome of today's hearing may slow down the agency's efforts to quickly make settlements, said Robert Heim, a former SEC attorney and a partner of Meyers and Heim in New York.

The agency, under Chairman Mary Schapiro, has been investigating cases at a rapid clip in the past few months.

"The developments today show that the judges in federal court won't be a rubber stamp for the SEC's settlements," Heim said. "The SEC's really going to have to justify the amount of their civil penalties in the future. This is going to really present the SEC with quite a few new challenges."

Bank of America also has agreed to pay $55 million in cash to settle a class-action complaint filed in September 2007 by former Countrywide Financial Corp. employees, according to documents filed Friday in U.S. District Court in Los Angeles. The workers had alleged that the Calabasas, Calif.-based mortgage lender failed to disclose crucial information about its financial health and the resulting plunge in Countrywide's stock price drove down the value of their retirement plan.

Judge John F. Walter on Monday agreed to hear the bank's motion for preliminary approval of the proposed settlement on Aug. 24.

Countrywide was a major player in the market for high-risk subprime mortgages, the disintegration of which touched off the financial crisis that has gripped the U.S. and global economies. Countrywide became the biggest U.S. mortgage lender overall before it spiraled into disaster when the mortgage meltdown hit. It was bought by Bank of America in July 2008. The SEC has filed civil fraud charges against former Countrywide chief Angelo Mozilo and other former executives alleging they misled investors about the company's financial health.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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