Bank of America Corp. (NYSE:BAC) received a blow from U.S. District Judge Jed S. Rakoff in their civil trial with the Securities and Exchange Commission, as Rakoff granted a request from the SEC to forbid expert witnesses for Bank of America to use media reports to support their claims that shareholders were aware of the huge bonuses Merrill Lynch & Co. were offering their top executives.
The trial stems from the same judge who threw out a $33 million settlement between the SEC and Bank of America last year, clearing the way for the civil trial.
In the case of two of the witnesses for Bank of America, they were going to use media reports as their primary evidence for asserting shareholders had knowledge of the circumstances surrounding the bonuses offered by Merrill Lynch.
What the SEC asserts is the proxy statement made it look like there were prohibitions in place for Merrill Lynch executives which would keep them from receiving large bonuses at the end of the year, something which they clearly did receive.
Further, the SEC also says Bank of America had already given consent to the bonuses in writing, up to $5.8 billion, even thought he proxy statement made it seem the bank wouldn’t allow that to happen.
Technically, Bank of America did nothing wrong in that, as it was the truth as far as the bonuses go. What they seem to have done wrong was not tell the shareholders they had indeed given approval to the bonuses as they were taking over the company. So while approval had to be given, it was given, but only the side of the equation that it had to be given was communicated to shareholders, and not the practical side of the fact that it already had been given.
The implication is shareholders understood they had to get approval for bonuses, but assumed from the proxy that approval hadn’t been given, when it actually had. These are the overall reasons for the refusal of Rakoff to allow media reports as evidence in the trial.
Rakoff was put off by all of it because of the arguments from the bank in its defense that shareholders and investors would have listened to media reports rather than the direct communication to them in the proxy. The judge said it “hints at hypocrisy.”
While all of this can be true, I still take issue with Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Henry Paulson who pressured Bank of America to make the deal with then CEO Ken Lewis wanted to walk away from it. In my estimation that generated pressure to make in happen in a way that partially made these issues happen. They should be on trial as well. Hopefully they’ll be forced to testify under oath before it’s all through. Their hands may be dirty in all of this as well.
