Corporate Governance

SEC v. BofA: The Other Shoe Drops (The Merrill Lynch Losses)(Part 1)

By J. Robert Brown

This action is about disclosure during the proxy process.  Merrill Lynch had to approve the merger; shareholders of BofA had to approve the issuance of the shares used to acquire Merrill Lynch.  When the SEC brought the original action (the one where Judge Rakoff bounced the settlement), it contained two surprises. 

One was that no individuals had been charged.  The other was that the false disclosure was not related to the burgeoning losses incurred by Merrill Lynch sometime around the date shareholders voted but involved the failure to make adequate disclosure with respect to the bonuses paid by Merrill.  Even then, the alleged misstatement was not about the amount of the bonuses.  The Commission essentially charged BofA with having falsely stated that the Merrill bonuses had not been approved when in fact they had.  Not a loser to say the least, but not the strongest fraud action.  After all, while the proxy statement may have misrepresented the state of bonus approval, the inevitability of approval may have rendered them immaterial.

There was a sense that the original case was a compromise.  BofA agreed to settle for a large penalty while the SEC brought about the most innocuous action that could be maintained.  Only Judge Rakoff rejected the compromise.

This compromise became clear in the Commission's efforts over the last few weeks to amend the complaint.  Now having to litigate, the Commission has apparently realized that by giving away the issue of the losses, it has a weaker case.  As a result, the Commission filed a motion asking for permission to amend the complaint and add a claim related to the nondisclosure by BofA the "extraordinary losses" sustained by Merrill Lynch.  In objecting to the motion, BofA noted that, in addition to the prejudice that it would suffer, that the SEC actually knew about the non-disclosure of the losses in the first half of 2009.  (A detailed affidavit by Victor Hou from Cleary sets out what the Commission knew and when).  In other words, the SEC was aware of the possible claim, did not bring it in the aborted settlement, but has now sought to add it back into the case.

Unfortunately for the SEC, Judge Rakoff denied the motion.  He rightfully noted that with a March 1 trial date, BofA did not have time to adequately prepare.  Judge Rakoff indicated that the Commission could file a separate action, which it promptly did.  We will discuss this new complaint in the next post.   

The letters and other primary materials are posted at the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on January 18, 2010 (boomark / email).