A federal judge rejected Bank of America Corp's
New York Attorney General Andrew Cuomo may file civil charges against some Bank of America executives, including some of the very highest-ranking, over the companies' January 1 merger, a person familiar with the probe said.
Chief Executive Kenneth Lewis and Chief Financial Officer Joseph Price could face civil fraud charges, the Wall Street Journal said, citing a person familiar with the probe.
A filing of charges would follow Monday's rejection by U.S. District Judge Jed Rakoff of the bank's settlement with the SEC, which he said cannot remotely be called fair.
Unhappy that the bank did not and was not forced to reveal which executives or lawyers knew of the bonuses, Rakoff called the settlement a contrivance designed to provide the SEC with the facade of enforcement and the management of the bank with a quick resolution of an embarrassing inquiry -- all at the expense of the sole alleged victims, the shareholders.
Rakoff ordered the bank and the SEC to prepare for a trial that would begin by next February 1.
Cuomo had imposed a deadline of the end of Monday for Bank of America and Lewis to disclose more about the Merrill purchase. He is seeking more information about the bonuses and Merrill's $15.8 billion fourth-quarter loss, including who knew what prior to December 5 shareholder votes to approve the merger.
Individuals are at the heart of what the attorney general's investigation is looking at, according to the person familiar with the probe, who requested anonymity because the probe is ongoing.
Lewis was ousted as the bank's chairman in April, and the Merrill merger has led many analysts and investors to question his hold on the chief executive job. Bank of America shares are down by half since the merger was announced last September 15.
Rakoff faulted the SEC for accepting the bank's effort to invoke attorney-client privilege and avoid disclosing what executives and lawyers knew about its authorization for Merrill to pay up to $5.8 billion of bonuses, though it was clear the bank blatantly lied about the payouts.
The judge also questioned why shareholders victimized by the bank's management should be responsible for any fine, especially as the bank would not admit to wrongdoing.
It is a body blow to the SEC's credibility, said James Post, a governance and ethics professor at Boston University School of Management. The bank, meanwhile, has no coherent strategy. Cuomo will not let go until he has the full story, and we don't have that yet.
Bank of America spokesman Scott Silvestri said the bank is prepared to litigate to show that its disclosures were proper, and will consider its legal options in the coming days.
SEC spokesman John Nester said the regulator will review Rakoff's order. Cuomo's office declined to elaborate on its September 8 letter to bank lawyers demanding more disclosure.
Rakoff's decision came as U.S. President Barack Obama, marking the one-year anniversary of Lehman Brothers Holdings Inc's
The settlement was to resolve SEC charges that the bank misled shareholders about having authorized the bonuses by not mentioning it in proxy statements for the merger.
Yet Rakoff said it suggests a rather cynical relationship between the parties: the SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger; the bank's management gets to claim that they have been coerced into an onerous settlement by overzealous regulators. And all this is done at the expense, not only of the shareholders, but also of the truth.
Professor James Cox, a law professor at Duke University in Durham, North Carolina, said: Not enough judges are doing what Judge Rakoff is doing. Way too often, the true miscreants do not contribute anything toward the settlement.
Bank of America agreed to buy Merrill after less than 48 hours of talks on the same weekend that Lehman was collapsing, but many of the alleged disclosure shortfalls came later.
The niceties about disclosures to shareholders were considered to be secondary, said Ronald Gilson, a law professor at both Columbia University and Stanford University.
Rakoff called it absurd to accept the SEC argument that a fine would help shareholders better assess the quality and performance of management.
Bank of America has received $45 billion of federal bailout money, including $20 billion to help absorb Merrill. Its shares closed up 2 cents at $16.99 on the New York Stock Exchange.
The case is SEC v. Bank of America Corp, U.S. District Court, Southern District of New York (Manhattan), No. 09-6829.
(Additional reporting by Elinor Comlay and Joe Rauch; editing by Leslie Gevirtz, Steve Orlofsky, Carol Bishopric and Bernard Orr)