Bank of America settlement stopped by the judge

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Federal Judge Jed Rakoff refused to sign-off on the Securities and Exchange Commission settlement with Bank of America (BAC) over $3.6 billion dollars in bonuses paid to Merrill Lynch employees. The SEC had agreed to a fine of only $33 million, but the judge said he was unable to determine if that amount was fair to the public.

At issue is the fact that Bank of America told investors in November 3 proxy materials that Merrill had agreed to hold off paying bonuses before the merger with BAC was completed, unless the bank consented. The bank omitted documents showing it had already approved the bonuses, according to the SEC complaint.

The impact on U.S. taxpayers comes into play because the bank received $45 billion in bailout money. While the bank contends none of these bailout funds were used to pay the bonuses, it has repeatedly told the court and the special inspector general in filings that it can't differentiate between TARP and other bank funds. In fact, in one filing on May 11, Bank of America told the special inspector general, "Since all TARP investment funds are part of our operating capital, they cannot effectively be segregated."

So it seems Bank of America can separate funds when it's in the banks best interest, such as a settlement in this lawsuit, but it can't separate those funds when the government wants to find out how the funds are being spent. Luckily we have judges like Rakoff to call them out on these inconsistencies. Obviously the SEC isn't ready to play this role, since it agreed to the settlement.

Rakoff thinks the settlement is too low, which seems to be true when you consider the $37 million Wachovia paid to settle similar allegations that it failed to disclose just $500 million in bonuses. If one bank has to pay $37 million for a $500 million error, why does another bank pay less for a much larger deception?

Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies and Trading for Dummies

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