SEC faces trouble with B of A settlement

The federal judge who was supposed to approve a $33 million settlement between Bank of America (NYSE:BAC) and the SEC over omissions in the bank's proxy statement for approving the Merrill Lynch deal is unhappy.

U.S. District Court Judge Jed Rakoff has ordered the SEC to explain why it did not push its investigation into the charge that B of A made inaccurate statements in the document. Put less politely, he wants to know why the bank would lie to its shareholders. B of A did not disclose the timing of bonuses paid to Merrill Lynch employees. The compensation totaled $5.8 billion.

Yesterday, the bank told Judge Rakoff that it was "widely understood" that the bonuses were to be paid and that the firm was essentially without fault. The firm also argued that it had relied on the advice of its attorney in preparing the proxy. That made the SEC's position that B of A had been in error more difficult to defend.

According to The Wall Street Journal, Judge Rakoff did not buy the assertion that the SEC settled in large part because it was B of A's counsel that had given the advice on what the proxy should contain. The paper writes that the Judge said the the statement is "at war with common sense." If that were the regulator's policy, "it would seem that all a corporate officer who has produced a false proxy statement need offer by way of defense is that he or she relied on counsel, and, if the company does not waive the privilege, the assertion will never be tested, and the culpability of both the corporate officer and the company counsel will remain beyond scrutiny." The two parties now have until September 9 to submit new briefs on details of the settlement and the events that lead up to it.

It is, of course, a good point. If the SEC believed that management at the bank was misleading shareholders about the bonuses being paid to Merrill employees, ti should have made a case around those serious charges. A payment of $33 million with no other sanctions would hardly be an appropriate could of action for what could only be viewed a fraud.

The SEC has been trying to improve its image after months of accusations that it was lax in keeping track of activity in the financial markets leading up to the credit crisis. New SEC chair Mary Shapiro has told the public that it can count on aggressive investigations and harsh penalties for individuals and companies that violate federal regulation.

The SEC could have made the B of A case into a gem, a nearly-perfect way to attack management practices at one of the biggest financial firms in the world. Instead it took the way out and made itself look foolish. The SEC has been good that the "foolish" part for a long time.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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