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Corporate & Securities Law

: Jim Hamilton's World of Securities Regulation

By Jim Hamilton

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Court Rejects Media Defense in Bank of America Case

U.S. District Judge Jed Rakoff of the Southern District of New York excluded expert testimony submitted by the Bank of America in its defense to civil charges brought by the SEC. (SEC v. Bank of America Corp.) The Commission charged that the bank falsely stated in the proxy materials that solicited approval of its purchase of Merrill Lynch that the firm was prohibited from paying bonuses without the bank?s subsequent consent. As alleged, the bank had already consented in writing to Merrill?s paying up to $5.8 billion in such bonuses.

As part of its defense, Bank of America argued that shareholders already knew as a result of widespread media report, that Merrill was expected to pay billions of dollars in year-end bonuses. The bank submitted expert testimony on the materiality of the disclosures and other questions that was substantially based on media coverage of the acquisition. The SEC moved to exclude the media reports and the related expert testimony because the proxy statement expressly warned shareholders not to rely on such extrinsic information. According to the bank, however, even if the warnings rendered the reports irrelevant to the issue of shareholder reliance, the evidence would still be a relevant part of the mix of information that determined whether the alleged misrepresentations were material.

As described by Judge Rakoff, the fact that the media predicted that Merrill would in fact pay bonuses ?is entirely irrelevant to any aspect of this issue, for the alleged falsehood consisted of representing as a contingency what was in fact an agreement already reached, and it does not appear that virtually any of the media reports disclosed that agreement." Furthermore, wrote the court, ?even if the media reports of Merrill?s likelihood of paying bonuses could otherwise somehow be said to bear indirectly on the question of how material was the bank?s alleged failure to disclose that it had in fact already approved the payment of such bonuses when it purported to represent that it had not given such approval, the warnings in the proxy statement totally changed the relevant mix of information for assessing materiality."

The court concluded that because the bank itself warned investors not to rely on the media, it would be unreasonable for a shareholder to consider the media pronouncements to be part of the relevant mix of information. ?In effect," stated Judge Rakoff, ?the bank is arguing that, even though it expressly warned its shareholders to disregard the media, it can now defend itself by asserting that a reasonable shareholder would have disregarded these warnings and, by consulting the media, perceived that the bank?s alleged lies were immaterial." He emphasized that ?even a zealous advocate might perceive that such an argument hints at hypocrisy."

Full post as published by Jim Hamilton's World of Securities Regulation on January 05, 2010 (boomark / email).