In its continuing effort to make government more efficient by using less paper, the SEC today simultaneously charged Bank of America with misleading investors about billions of dollars in bonuses that were being paid to Merrill Lynch executives at the time of its acquisition of the firm in 2008 and agreed to dismiss the case in return for $33M (a whopping 0.44% of BofA's 2009 YTD earnings) -- all in one press release.
The SEC claimed that in its proxy materials concerning its proposed merger with Merrill last year, BofA said Merrill had agreed not to pay bonuses to its execs without the consent of BofA. It turns out, though, that BofA had already contractually authorized Merrill to shell out up to $5.8B in bonuses for 2008 (a mere 12% of the $50B merger price).
To its credit, the SEC didn't announce plans to refer the case for criminal indictment or charge any BofA officers or directors (what? it makes perfect sense that a corporation can err without any of its people erring) despite what many investor advocates regard as an open-and-shut case of flagrant securities fraud. Needless to say, BofA -- which admitted no liability in the settlement -- announced no plans for an internal investigation to discover how the wrongdoing didn't occur and who didn't commit it.
The SEC must have come to its senses and realized immediately after bringing the charges that the whole imbroglio -- which has sparked Congressional hearings, led to a New York State Attorney General investigation, and implicated Ben Bernanke and Hank Paulson -- was all a big misunderstanding. When BofA said Merrill would not pay any bonuses, what it really meant to say was that Merrill would not pay any bonuses "in excess of $6B." Anyone could have made that drafting error. And BofA's failure to append to the proxy statement the written agreement that allowed Merrill to pay the bonuses was probably the result of an unfortunate oversight by a junior member of BofA's outside counsel team. Besides, in the end, Merrill didn't pay anywhere near $5.8B in bonuses. Its bonuses totaled only $3.6B -- a full $23B less than Merrill lost in 2008.
The SEC also had the good sense not to bring charges relating to the outlandish allegations that BofA committed an even more egregious violation of the securities laws, and a breach of fiduciary duty to shareholders, by failing to disclose Merrill's mounting credit-related losses when they became apparent to BofA after the merger vote but before the closing. A paltry $12B in unanticipated losses, with no telling how many more billions in losses to come, hardly constitutes a "material adverse change" (which would have allowed BofA to back out of the deal). And if you don't trust my legal judgment, just ask any BofA lawyer.
And besides, this is a matter best left to internal corporate governance. Those BofA shareholders who didn't sell their stock at a monumental loss before the company's annual meeting in April voted to retain Lewis as CEO despite the alleged securities violations, the Merrill losses, the BofA red ink, the plummeting share price, and the bank's need for tens of billions in taxpayer handouts and loan guarantees to stay afloat. What better proof could there be that Lewis did nothing wrong?
The SEC also deserves a pat on the back for not embroiling itself in the messy allegations that two top government officials -- Bernanke and Paulson -- threatened to fire Lewis if he didn't close the Merrill deal after discovering the unexpected losses. Bernanke and Paulson's actions were clearly justified under the little-known "systemic risk" exception to the securities laws. Ordinarily, corporate executives have a duty to disclose material information to shareholders relating to a securities transaction like a merger proposal, and a government official pressuring an executive not to do so could be considered aiding and abetting, or perhaps even suborning violation of the securities laws.
However, when a government official believes that a transaction is crucial to the stability of the financial system, all 75-years-worth of securities regulation is automatically placed on double-secret suspension until after the transaction is completed. Of course, this exception isn't explicitly stated anywhere in the securities laws -- it's just, sort of, understood by those in the know. Don't believe me? Just ask Ben Bernanke's attorney.
As for Lewis's capitulation to these officials' pressure, he's exempted from liability by the even-lesser-known "I-had-to-throw-my-shareholders-under-a-bus-to-save-my-phoney-baloney-job" exception. (That one's explicit in the securities laws.)
Unfortunately, the BofA shareholders who lost billions by buying or holding BofA stock between the time of the merger vote and the revelation of the undisclosed Merrill bonuses and losses weeks later probably won't be satisfied with these innocent explanations. (Nor will the pain-in-the-ass, Wall Street-hating Attorney General of New York. No, not "Client No. 9," the new one.) And because BofA shareholders are represented by the greedy sharks known as securities class action lawyers, they probably won't settle for $33M in lieu of those lost billions, like Schapiro did. If only Mary's service to Ken today had included a wholesale retroactive repeal of the securities laws, he might have given her an even bigger tip.
(In completely unrelated news, BofA announced today it was shuffling its senior management, while (thank GoldmanGod) leaving the Great Helmsman, Ken Lewis, still at the wheel. Although BofA didn't admit any culpability in its settlement with the SEC, this "management shakeup," along with the settlement, means BofA can put all this unpleasant non-wrongdoing behind it with a shiny happy new management team headed by the same old reliable, competent and trustworthy leader.)