Monday, August 24, 2009

When "understanding" goes awry....

According to the WSJ, BoA attorneys today filed statements in court that made clear their perspective on the $3.6 billion in Merrill Lynch bonuses that were paid out just one day before it was absorbed by BoA:

"Bank of America Corp. said Monday it did not mislead shareholders about its approval of billions in Merrill Lynch & Co. bonuses before a merger of the two firms, noting that it was "widely understood" that Merrill would award year-end compensation and the bank never told investors it had prohibited such payments.

Bank of America said Merrill disclosed its intention to pay bonuses in separate federal filings throughout 2008.

The new statements were made in a filing to federal Judge Jed Rakoff, who has refused to sign off on a $33 million settlement of a Securities and Exchange Commission civil lawsuit targeting the bank for what it disclosed about the bonuses before a December shareholder vote. The SEC said proxy documents sent to investors in November 2008 show Merrill wouldn't pay year-end bonuses without Bank of America's consent, while a separate document never distributed to shareholders shows Bank of America approving up to $5.8 billion.

Merrill's compensation committee approved $3.6 billion in bonuses three days after shareholders blessed the deal, and Merrill employees received their payouts one day before the merger closed. The bonuses sparked outrage on Main Street in light of Merrill's $27.6 billion in losses for all of 2008 and the $45 billion in government aid awarded to Bank of America...."

Let's reminisce about those days once again... execs at a company that lost $27.6 billion in 2008 and received $45 billion in government aid were the recipients of billions in bonuses that were not disclosed to shareholders before they signed off on the merger.

What's not to understand?

It is always interesting when a "widely understood" matter becomes the source of significant controversy. Seems like the desire of BoA to think the bonus scheme was "widely understood" does not necessarily make it so.

In January 2009, the bonuses were not at all understood by NY Attorney General Andrew Cuomo, who decided to investigate the payments.

Earlier this month, the SEC did not see eye-to-eye with BoA on this matter, charging that the bank had mislead shareholders about the bonuses. Rather than fight the SEC on this matter, BoA has agreed to pay $33 million to settle the matter, without admitting or denying fault - an expensive way to deal with a "widely understood" matter that few outside of Wall Street really understood.

But we'll see what Judge Rakoff has to say on this - according to this NY Times story, the judge is thirsty for more details on the deal:

"Nearly a year after its deal to purchase Merrill Lynch, Bank of America is still on the defensive.

In a court filing on Monday, Bank of America said it had acted properly when it did not disclose details about Merrill’s bonuses in advance of a shareholder vote on the merger. And, the bank said it believed its view would prevail in court if the matter were put to test, The New York Times’s Louise Story reported.

A United States District Court judge in New York, Jed S. Rakoff, demanded two weeks ago that the bank and the Securities and Exchange Commission provide a better explanation of its settlement over the bank’s failure to disclose the bonuses. The S.E.C. is also expected to file a memorandum on Monday.

Judge Rakoff said the bank’s $33 million settlement with the commission seemed “strangely askew,” and he questioned the S.E.C.’s decision to charge the bank at the corporate level rather than individual executives.

The judge requested that Bank of America supply the names of people who decided last year to not disclose the bonuses. He said he wanted to know the “who, what, where” behind the creation of the bank’s proxy statement, the document provided to shareholders before they voted on the merger.

“I cannot ignore issues of responsibility,” Judge Rakoff said at the hearing on Aug. 10. “Was there some sort of ghost that performed those actions?”
The bank did not detail which of its directors or executives were involved in the proxy disclosure decisions. It did, however, name the law firm that represented it during the merger proxy, Wachtell, Lipton, Rosen & Katz. nd the bank said that Merrill Lynch’s firm was Shearman & Sterling. The bank also listed the names of the directors on Merrill’s compensation committee and pointed out that the S.E.C. did not claim that the bank acted with intention or in a reckless manner.

Merrill’s $3.6 billion in bonuses have been scrutinized in Congressional hearings this summer as well as in documents released by the New York attorney general. And Judge Rakoff said in his hearing that the bonuses seem to have been essentially paid using taxpayer money, since Bank of America had received $45 billion in bailout funds.

The bank said it was important to focus on the issue of disclosure of the bonuses, rather than their size.

“This case is not about the decision by Merrill Lynch’s board to award the incentive compensation that it did,” the bank’s lawyer, Lewis J. Liman, wrote. “Bank of America recognizes that decision has been the subject of controversy.”

Bank of America spent most of its memo on the defenses it would make in court. The bank said there was no false or misleading information in the proxy. And the bank accused the S.E.C. of seizing on “a single sentence fragment” for the accusations.

Furthermore, the bank pointed to Merrill’s financial statements, which showed last fall that money was still set aside for compensation at similar levels to the previous year, even after the merger was announced. The bank also said shareholders would have known of the bonuses because several media outlets wrote about them in general terms in advance of their payment.

Two legal experts wrote affidavits to accompany the bank’s filing, and both said the bank acted appropriately in its disclosure. One, Morton A. Pierce, the chairman of Dewey & LeBoeuf’s mergers and acquisitions group, was paid for his memo. The other, Joseph A. Grundfest of Stanford Law School, wrote his memo on a pro bono basis because he was concerned the S.E.C. would have a hard time settling future issues if Judge Rakoff does not approve its deal with Bank of America.

The S.E.C. is expected to file its memo to the judge by the end of the day. Then both parties will have two weeks to respond to each other’s filings. If Judge Rakoff does not approve the $33 million settlement, then the S.E.C. will probably drop the case, renegotiate the settlement amount or take it to court."

Here's a link to the 35 page brief, if you're so inclined: BoA filing PDF

The Atlantic has a story that defines the BoA defense of the bonuses as "bizarre."

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