A federal judge refused to approve a proposed settlement between the U.S. Securities and Exchange Commission and Bank of America Corp over the payment of bonuses to Merrill Lynch & Co executives, saying he was unable to determine if it was fair to the public.

The largest U.S. bank agreed on August 3 to pay $33 million to resolve an SEC civil lawsuit accusing it of misleading shareholders by not disclosing it had authorized the payment of up to $5.8 billion of bonuses to Merrill employees. About $3.6 billion was awarded.

But at a hearing on Monday, Judge Jed Rakoff of the federal court in Manhattan said he needed a much more detailed account of the underlying facts before signing off on the settlement.

I would be less than candid if I didn't express my continued misgivings about this settlement at this stage, Rakoff said. He said the settlement seems to be lacking in transparency.

Noting that the government had pumped $45 billion of taxpayer money into Bank of America from the federal bank bailout plan, the Troubled Asset Relief Program, Rakoff also said he could not reconcile the SEC's position that the bank effectively lied to shareholders, with the regulator's decision not to force the bank to admit wrongdoing.

Given the bailout money awarded to Charlotte, North Carolina-based Bank of America, including $20 billion used to help absorb Merrill, Rakoff said that one might infer that public money was used, in effect, to pay the bonuses.

Don't I need to know what the truth is before I could make a determination here? Rakoff said. Is there not something strangely askew in a fine of $33 million?

A Bank of America spokesman had no immediate comment. The SEC was not immediately available for comment.

The judge directed both sides to make new submissions on August 24 and September 9.


According to the SEC complaint, Bank of America told investors in proxy documents that Merrill agreed not to award bonuses or incentive pay before the merger closed, when in fact the bank had authorized Merrill to pay bonuses.

Rakoff appeared skeptical that Kenneth Lewis and John Thain, the chief executives of Bank of America and Merrill, should not be held to account for the decision not to disclose the bonuses to shareholders before they voted on the merger.

If you are correct that this proxy statement was materially misleading, Rakoff told an SEC lawyer, then at a minimum Mr. Thain and Mr. Lewis would seem to be responsible for that. He asked rhetorically whether some sort of ghost was responsible for drafting the bonus agreement.

Maureen Lewis, an SEC lawyer, responded that Lewis and Thain relied on the lawyers' advice and didn't know what was in the disclosure schedule.

Bank of America lawyers denied that federal bailout money was used improperly. This is not a case in which there is any risk or threat to TARP funds, Lewis Liman, a lawyer for the bank, told the judge.

The $33 million penalty was below the $50 million that General Electric Co agreed last week to pay to settle SEC fraud charges.

Lawyers said it is rare for judges to delay so-called SEC consent agreements, but Rakoff has done it before.

In 2003, he blocked a $500 million settlement with WorldCom Inc over the accounting fraud that led to the phone company's bankruptcy. He later approved a $750 million payout.

The Merrill merger has weakened Lewis, whose bank faces many lawsuits, regulatory probes and anger of shareholders and lawmakers over the bonuses and the extent of Merrill's losses.

Since April, Lewis has lost his job as chairman and more than half of his long-supportive board of directors.

Shares of the bank have fallen 51 percent since the merger was announced last September 15. They closed Monday up 26 cents at $16.68 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.

(Reporting by Jonathan Stempel; editing by Andre Grenon and Carol Bishopric)