The fate of the Securities and Exchange Commission's $150 million accord with Bank of America Corp over the Merrill Lynch & Co takeover hung in the balance as a federal judge sought help in resolving striking inconsistencies in events leading up to the merger.
U.S. District Judge Jed Rakoff in Manhattan on Wednesday delayed ruling on the settlement to February 22 from February 19, after inviting New York Attorney General Andrew Cuomo to provide testimony by five people involved in the merger, including fired Bank of America
Cuomo's office said it will comply. The attorney general on February 4 filed civil fraud charges against the largest U.S. bank, former Chief Executive Kenneth Lewis and former Chief Financial Officer Joe Price over the merger.
But the chances for approval of the SEC settlement may have suffered a setback after the largest U.S. bank said it would not agree to giving the regulator and the court a role in choosing a consultant to help it set compensation.
That had been a key focus of Rakoff at a February 8 hearing, in which he suggested modifications to the settlement that might be needed to win his approval.
The SEC has consistently stated that it does not seek to enforce any particular compensation philosophy or impose any substantive judgments on the form or amount of compensation, Lewis Liman, the bank's outside counsel, wrote.
The proposed $150 million settlement would resolve two SEC lawsuits accusing Bank of America of misleading shareholders ahead of a December 5, 2008 shareholder vote on the merger.
One lawsuit concerned a failure to reveal Merrill's soaring losses, which reached $15.8 billion that quarter. The other concerned the bank's authorization for Merrill to pay $3.6 billion of bonuses.
Should Rakoff reject the settlement, the SEC lawsuit over the bonuses would likely go to trial on March 1. Rakoff in September rejected a $33 million accord.
GENERAL COUNSEL FIRED
Much of the focus has been on the circumstances under which Bank of America terminated Mayopoulos on December 10, 2008.
The SEC said Bank of America fired Mayopoulos in an attempt by Lewis to avert the imminent departure of Brian Moynihan, then head of corporate and investment banking and now chief executive, not because of Mayopoulos' legal advice on Merrill.
Bank of America had even drafted a press release to announce Moynihan's exit, and planned to replace him with then-Merrill Chief Executive John Thain, the SEC said.
Citing Lewis, the SEC said Mayopoulos was terminated for reasons having no connection to his legal advice or any other aspect of his job performance. It added that several bank officers and directors, as well as e-mails and other communications, corroborated this account.
Rakoff had also asked for more details on the role of the bank's law firm Wachtell, Lipton, Rosen & Katz in deciding what to disclose about Merrill's losses.
The SEC said the highest projected Merrill fourth-quarter loss that Wachtell knew about prior to the December 5 vote was $5 billion. It said Wachtell partners Edward Herlihy and Nicholas Demmo agreed in a November 20 conference call that no further disclosure of losses was necessary.
Bank of America spokesman Bob Stickler and a Wachtell partner, Ted Mirvis, declined to comment.
Cuomo's lawsuit said Mayopoulos was long kept in the dark about Merrill's losses, but by the time of his firing knew too much about how large they had become.
Even now, Cuomo's office still sees red flags concerning that firing, a person familiar with the matter said.
The issues include why Mayopoulos was let go and escorted from his office just after learning Merrill's losses had soared, why Mayopoulos was not told why he was fired, and why Moynihan became general counsel after not having practiced law for several years, the person said.
Rakoff has noted how different the SEC's and Cuomo's allegations appear. I'm really presented here with two, I think, strikingly different versions of the facts, he said at the February 8 hearing.
Moynihan replaced Lewis as chief executive when the latter retired from the bank at the end of 2009. Price is now Bank of America's head of consumer, small business and card banking. Cuomo's office this month said Moynihan is not a target.
Separately, the SEC revealed that a Bank of America investor, believed to be one of its top shareholders, asked several days before the December 5 vote whether the bank should try to back out of the merger.
In a footnote, the SEC said that according to Price, several days before December 1, (2008,) an institutional investor in Bank of America, Cap World, inquired if Bank of America could renegotiate the deal.
According to the SEC filing, Cap World asked whether the bank could do this by invoking a material adverse change (MAC) clause because of Merrill's deteriorating finances.
Cap World is believed to be short for Capital World Investors, a part of Capital Research & Management in Los Angeles, a person briefed on the matter said. That firm oversees the giant American Funds mutual fund family.
Bank of America did not try to invoke the MAC provision until after the shareholder vote, when in mid-December it told federal regulators it wanted to back out of the merger. It soon got a $20 billion federal bailout, which it has since repaid.
The SEC and American Funds declined to comment.
Bank of America shares closed Wednesday up 50 cents, or 3.3 percent, at $15.66.
The cases are SEC v. Bank of America Corp, U.S. District Court, Southern District of New York, Nos, 09-06829 and 10-00215.
(Reporting by Jonathan Stempel; Additional reporting by Grant McCool in New York, Joe Rauch in Charlotte, North Carolina, Rachelle Younglai in Washington, D.C., and Aaron Pressman in Boston; Editing by Gerald E. McCormick and Phil Berlowitz)