SEC expands charges against Bank of America, saying it failed to disclose losses at Merrill

SEC expands charges against BofA

WASHINGTON — Federal regulators have expanded their charges against Bank of America Corp. over billions in bonuses paid at Merrill Lynch, accusing the bank of failing to disclose mounting losses at Merrill before a shareholder vote approving the combination of the two firms.

The Securities and Exchange Commission announced Monday it had asked a federal judge in Manhattan to allow it to file the new civil charges against the biggest U.S. bank. But the SEC also said it wouldn’t charge any individual Bank of America executives, directors or attorneys because they are not alleged to have “deliberately concealed” information from the bank’s outside attorneys or otherwise acted with intent to mislead.

Bank of America said it was glad the regulators had found no basis to charge any individuals or to assert a charge of fraud against the bank.

However, it added, “Despite this vindication, we believe the new claims the SEC seeks to bring are without merit and we will oppose this motion.”

The SEC and Bank of America, which is based in Charlotte, N.C., are scheduled to go to trial on March 1. The SEC previously accused the bank of failing to disclose the bonus payments to after it acquired the brokerage firm a year ago.

Last September, the judge threw out a proposed $33 million settlement of those charges and ordered a trial. He rebuked the SEC for not pursuing charges against individual executives of Bank of America — a course the SEC said Monday it wouldn’t pursue.

U.S. District Judge Jed Rakoff also called the proposed settlement a breach of “justice and morality,” and said it unfairly penalized Bank of America shareholders.

Rakoff ruled at a hearing Monday afternoon that the SEC must file a new, separate lawsuit with the new charges concerning disclosure of the Merrill losses, rather than adding them to its suit over the bonuses.

Both the SEC and Bank of America said they were happy with the judge’s ruling.

“We are pleased that the court has permitted us to pursue these charges in a separate complaint,” SEC spokesman John Nester said in a statement. “As a result, we intend to file promptly our allegations that Bank of America failed to disclose the Merrill Lynch losses.”

The SEC said it would charge Bank of America with failing to disclose “extraordinary financial losses” at Merrill in the two months preceding the shareholders’ Dec. 5, 2008, vote approving the takeover of the storied Wall Street brokerage house.

The regulators said they would allege that Bank of America “erroneously and negligently concluded that no disclosure concerning these extraordinary losses was required as shareholders were called upon to vote on the proposed merger with Merrill Lynch.”

The $20 billion takeover deal was forged at the height of the financial crisis, on the same September weekend that Lehman Brothers collapsed. It was first questioned after Bank of America disclosed that Merrill would post 2008 losses of $27.6 billion — far more than expected. Bank of America, which had already received $25 billion in U.S. bailout aid, then asked for and received an additional $20 billion from the government to help offset those losses.

The SEC last year accused Bank of America of failing to disclose to shareholders that it had authorized Merrill to pay up to $5.8 billion in bonuses to its employees in 2008 despite the steep losses.

On another legal front, New York Attorney General Andrew Cuomo is expected to file charges related to bonuses against Bank of America and several high-ranking executives.

The SEC noted in its announcement Monday that Merrill had a net loss of $4.5 billion in October 2008 and estimated that it had sustained billions of dollars of additional losses in November. The actual and estimated losses together represented about a third of the value of the merger at the time of the December shareholder meeting and more than 60 percent of the total losses that Merrill posted in the preceding three quarters, the SEC said.

The agency said that Merrill’s “slumping performance represented a fundamental change” to the information that Bank of America had provided to shareholders in its Nov. 3 proxy statement seeking their votes to approve the merger. The bank also had promised to update its disclosures to shareholders with any substantial changes, the SEC said. Its failure to do so made its prior disclosures “materially false and misleading,” the SEC said.

Bank of America, in its statement, said it was “disappointed that more than two months after the court-imposed deadline to amend its complaint and in the absence of any new information, the SEC now at the 11th hour is nevertheless trying to add new charges.”

The bank reaffirmed its position that the company and its executives “provided sufficient and appropriate disclosure prior to the shareholder vote, … having been advised by some of the finest internal and external lawyers in the world.” Before the Dec. 5 shareholder vote, Merrill posted five straight quarters of multibillion-dollar losses, and fourth-quarter losses known to the company before the vote “were in line with that history,” it said.