Judge Rakoff held his nose today and approved the second settlement submitted to him by the SEC and BofA. Channeling popular rage over Wall Street, bank bailouts, and excessive executive compensation, the Judge, deferring to the SEC’s judgment that the settlement is fair, reasonable, adequate, and in the public interest, and exercising judicial restraint, approves the settlement while “praising” it as “better than nothing,” and representing “half-baked justice at best.” Opinion and Order of February 22, 2009 (“Opinion”) at 14.
A. Not One for Framing
In light of Judge Rakoff’s treatment of their settlement of this case, it is unlikely that the Commission or its enforcement staff will highlight SEC v. Bank of America Corp. in their accomplishments for 2010. Judge Rakoff is not hesitant to express his views of the Commission’s work product. He announces at the beginning of his opinion that he “reluctantly” grants the Commission’s motion to approve the settlement. He makes clear up front that, based upon his review of the evidence developed by the Commission since his rejection of the first settlement presented to him in the summer of 2009, that BofA’s proxy statement sent to its shareholders in connection with the December 5, 2008 meeting called to approve the Merrill merger failed to adequately disclose the Bank’s agreement to pay Merrill executives up to $5.8 billion in bonuses and failed to adequately disclose the huge losses Merrill suffered during the fourth quarter of 2008. He belittles the Bank’s defense that the nondisclosures were not material:
“Despite the Bank’s somewhat coy refusal to concede the materiality of these nondisclosures, it seems obvious that a prudent bank shareholder, if informed of the aforementioned facts, would have thought twice about approving the merger or might have sought its renegotiation.”
Opinion at 3-4.
As I have noted in previous posts, the Judge was clearly influenced by the allegations of New York’s Attorney General, Andrew Cuomo, in his action against the Bank, Lewis, and Price, filed the day before the Commission presented its second settlement for Judge Rakoff’s approval. The Judge sought and received transcripts of Cuomo’s office’s examination of BofA General Counsel Mayopoulos and others, receiving it ex parte due to that office’s objection to making public the transcripts of such testimony (on the grounds that it would prejudice the office’s prosecution of the case against the Bank and its two former principal officers were the transcripts shared with the Bank).
The Judge rejects the Bank’s objection to his consideration of evidence from Cuomo’s case as “frivolous,” asserting that it would have been a “dereliction” of his duty to ignore evidence of Cuomo’s claims of willful misconduct to test the factual assumptions underlying the settlement presented by the Commission to him for approval. On the other hand, the Judge concedes, in a footnote, that his decision to accept the materials “ex parte” was “problematic,” acknowledging the Bank’s “legitimate concern that the Court’s determinations be made on a record fully available for [its] scrutiny.” Opinion at 6, note 3.
B. Mayopoulos’ Firing
After reviewing the evidence submitted to him, the Judge “concludes that none of the evidence directly contradicts the Bank’s assertion that Mayopoulos’ termination was unrelated to the nondisclosures or to his increasing knowledge of Merrill’s losses.” Opinion at 7. Nevertheless, the Judge is careful to note that “contrary inferences might be drawn” from the evidence, including the fact that the Bank terminated Mayopoulos on such short notice and “asked [him] to leave the premises immediately.” Id.
C. Officers of BofA Acted Negligently
Perhaps the most crucial conclusion reached by the Judge is that the evidence supports the Commission’s conclusion “that the Bank and its officers acted negligently, rather than intentionally, in causing the nondisclosures that are the predicates to the settlement here proffered, …” Id. at 8. This conclusion was “reasonable” by the SEC, supported by “substantial evidence,” and one that a “reasonable regulator could draw.” Id. It is highly unlikely the Bank will cite any language from this Opinion, but if it does it will be this text.
D. The Settlement’s Prophylactic Measures
The Judge accepts the prophylactic measures exacted from the Bank by the SEC, including the modifications to two of them that he requested, and accepts the Bank’s rejection of the suggestion that the SEC and the Court play a role in the selection of an independent compensation consultant to the Board’s compensation committee. In doing so, the Judge cannot help getting in his digs on the Bank’s officers and lawyers:
“Given that the apparent working assumption of the Bank’s decision-makers and lawyers involved in the underlying events at issue here was not to disclose information if a rationale could be found for not doing so, the proposed remedial steps should help foster a healthier attitude of ‘when in doubt, disclose.’”
Opinion at 9.
E. The Settlement’s $150 Million Fine
The Judge’s strongest criticism is for the $150 million fine agreed to by the Bank in the second settlement. Accepting the Bank’s and the Commission’s agreement to explicitly provide that distribution of the fine will not be made to Merrill “legacy” shareholders of BofA or to Bank officers or directors who had access to the undisclosed information, Judge Rakoff continues to express his outrage that innocent shareholders, including innocent Merrill legacy shareholders of BofA, are bearing the cost of the fine and not the culpable officers of Bank, even if they were guilty only of negligence:
“… the effect [of the exclusion of Merrill legacy shareholders] is very modest, amounting perhaps to no more than a few pennies per share. Moreover, while the ‘legacy’ Merrill shareholders may have received something of a windfall as a result of the nondisclosures, they were not responsible for those nondisclosures. Rather, the responsibility was that of the Bank’s executives, who, although barred from receiving any part of the $150 million fine, are not contributing to its payment in any material respect.”
Opinion at 13.
So, all in all, while the settlement, concludes Judge Rakoff, is “better than nothing, this is half-baked justice at best.” Opinion at 14.
In fact, the Judge goes as far as to state that if this proposed settlement were first presented to him, he would reject it as “inadequate and misguided.” Id. So why is he approving it? Because, explains the Judge, he would “fail in [his] duty if [he] did not give considerable weight to the S.E.C.’s position.” And, even more importantly to the Judge, he has to take into account “considerations of judicial restraint,” meaning that, having made his preferences clear, he cannot act upon them!
So, realizing that he is a judge and not an enforcement god, Judge Rakoff “while shaking [his] head,” approves the settlement.
It is safe to say that the Bank and the Commission are more than pleased to close the door on Judge Rakoff’s courtroom and exit Foley Square as quickly as possible.
Monday, February 22, 2010
Saturday, February 20, 2010
SEC v. Bank of America Corp.: Ruling on Second Settlement Imminent; Judge Rakoff: Bull in a China Shop
Judge Rakoff is scheduled to rule on the second settlement submitted by the SEC and BofA for Court approval this coming Monday, February 22. It is apparent from the submissions made by the parties since my post of February 12 that both the SEC and the Bank are saying to the Judge “Enough, Already,” and want him to get on with it and approve the settlement. I still believe he will do so, but lifetime tenure does something for federal judges – it makes them very, very independent.
A. The SEC’s Supplemental Statement of Facts
In response to the Judge’s February 11 order, both the SEC and the Bank have, through counsel, corresponded with Judge Rakoff, jointly submitted the evidentiary record on issues requested by the Judge, and the SEC has submitted a Supplemental Statement of Facts (the “Statement”) summarizing the evidentiary record. By the Statement, the SEC confirms its conclusions that:
• General Counsel Timothy Mayopoulos advised management of the Bank, after conferring with the Wachtell firm, that the Bank was not required to make additional disclosure to its shareholders concerning Merrill’s forecasted fourth-quarter losses before the shareholder meeting held on December 5, 2008;
• Wachtell supported Mayopoulos’s advice; and
• Mayopoulos’s firing on December 10, 2008 was “for reasons which had no connection to his legal advice or any other aspect of his job performance.” Statement ¶2.
The Commission does not provide any argument in the Statement. By its detail, however, the Commission reinforces its conclusion that there is no basis for a finding of bad faith or scienter by Mayopoulos or Wachtell in the legal advice they gave the Bank.
While the evidence cited by the Commission on Mayopoulos’s firing supports the Commission’s conclusion on the absence of any motive to terminate Mayopoulos for any legal advice he gave, the termination does illustrate the brutality of corporate politics. According to the evidence developed by the Commission, Mayopoulos was fired to make room for Brian Moynihan, then BofA’s head of its investment banking division (and now CEO of the Bank).
As a result of the pending merger with Merrill, Moynihan’s position was going to be eliminated, and John Thain, Merrill’s CEO, was to take over the combined entity’s investment banking operations. The BofA board of directors balked at Moynihan’s pending departure, urging Ken Lewis to find a suitable position for him. Lewis decided to place Moynihan in Mayopoulos’s position as General Counsel of the Bank, even though Moynihan had not practiced for years and his bar membership was not then even active.
So, according to the evidence developed by the SEC, Mayopoulos was fired not by reason of his performance, loyalty, or competence, but simply to make room for an officer that Lewis was prepared to lose but the Board of Directors of the Bank wanted to retain.
B. Cuomo’s Office’s Response
By its letter dated February 16, 2010 to the SEC, Cuomo’s office rejected the Commission’s request to turn over transcripts of the testimony of Mayopoulos and others given by them to Coumo’s office. Coumo's office stated that turning over such materials would adversely affect that office’s prosecution of its case against the Bank, Lewis, and Joe Price, the Bank’s former CFO.
In response to this letter, Judge Rakoff jumped in with his Order of February 17, stating his desire to see the requested materials to enable him to determine “whether the conclusions on which the S.E.C. premises its proposed settlement have an adequate basis in fact or are materially at variance with other sworn testimony.” Order at 2. Given the time constraints, the Judge simply requested that Cuomo’s office “voluntarily” produce the materials to the Court, suggesting that if Cuomo’s office deemed it necessary, the production could be made “ex parte,” meaning to the Court alone, without copying the SEC or BofA.
Cuomo’s office took up the suggestion and submitted the materials ex parte to the Court by its letter dated February 19.
C. BofA’s Response
BofA initially responded to Judge Rakoff’s Order of February 11 by its letter to the Court of February 16. Barely disguising its irritation, the Bank “respectfully” pointed out to Judge Rakoff that the second proposed settlement “was the result of arm’s length negotiations” between BofA and the Commission and, in the opinion of the Bank, “no changes” were necessary to the proposed consent judgment submitted by the Commission and the Bank to the Court. Nevertheless, the Bank stated its agreement to the Judge’s request for Commission and, possibly, Court involvement in the appointment of an independent auditor to assess the Bank’s disclosure controls and procedures and the retention of disclosure counsel for BofA’s audit committee.
But the Bank balked at Judge Rakoff’s request that the Commission and the Court participate in the selection of an independent compensation consultant for the Board’s compensation committee. The consent judgment submitted by the SEC and the Bank provides for the retention of an independent compensation consultant by the compensation committee, to be selected solely by the compensation committee. The Judge requested in his February 11 order that the consultant be acceptable to both the SEC and the Court and that, if the Bank and the SEC could not agree on the consultant, the Court would make that choice. That request irritated the Bank:
“. . . we do not believe that the third proposed change to the Consent Judgment is necessary to achieve or tailored to the remedial objectives of the settlement, and we further believe that this proposed change would impose on the SEC a substantive role that the SEC expressly does not seek and that is outside the province of the SEC and the Court.”
BofA letter of February 16, at 3 (footnote omitted).
In response to Cuomo’s office’s turning over materials, ex parte, to the Court, the Bank submitted its letter of February 18 in protest. The Bank’s position is that evidence developed in other forums and not in the pending actions against the Bank before Judge Rakoff should not be considered by the Court. This is not a frivolous complaint, and could serve as the basis for any appeal by the Bank to Judge Rakoff’s decision on the settlement, assuming he does not approve it.
____________________
If Judge Rakoff does not approve the second settlement, he will certainly confirm his reputation as a maverick. Without familiarity with the procedural hurdles that might confront the Commission or the Bank in challenging any rejection of the settlement by the Judge, one would think that if he rejects the settlement one or both of the parties will seek review of his decision by the Second Circuit and/or seek to disqualify Judge Rakoff from presiding over the trial of this case. It is not too much to ask how Judge Rakoff could maintain his impartiality if, as a result of his detailed review of deposition transcripts and other evidence, he concludes that the settlement should be rejected because the Commission has failed to name officers of the Bank and/or its counsel for securities law violations.
A. The SEC’s Supplemental Statement of Facts
In response to the Judge’s February 11 order, both the SEC and the Bank have, through counsel, corresponded with Judge Rakoff, jointly submitted the evidentiary record on issues requested by the Judge, and the SEC has submitted a Supplemental Statement of Facts (the “Statement”) summarizing the evidentiary record. By the Statement, the SEC confirms its conclusions that:
• General Counsel Timothy Mayopoulos advised management of the Bank, after conferring with the Wachtell firm, that the Bank was not required to make additional disclosure to its shareholders concerning Merrill’s forecasted fourth-quarter losses before the shareholder meeting held on December 5, 2008;
• Wachtell supported Mayopoulos’s advice; and
• Mayopoulos’s firing on December 10, 2008 was “for reasons which had no connection to his legal advice or any other aspect of his job performance.” Statement ¶2.
The Commission does not provide any argument in the Statement. By its detail, however, the Commission reinforces its conclusion that there is no basis for a finding of bad faith or scienter by Mayopoulos or Wachtell in the legal advice they gave the Bank.
While the evidence cited by the Commission on Mayopoulos’s firing supports the Commission’s conclusion on the absence of any motive to terminate Mayopoulos for any legal advice he gave, the termination does illustrate the brutality of corporate politics. According to the evidence developed by the Commission, Mayopoulos was fired to make room for Brian Moynihan, then BofA’s head of its investment banking division (and now CEO of the Bank).
As a result of the pending merger with Merrill, Moynihan’s position was going to be eliminated, and John Thain, Merrill’s CEO, was to take over the combined entity’s investment banking operations. The BofA board of directors balked at Moynihan’s pending departure, urging Ken Lewis to find a suitable position for him. Lewis decided to place Moynihan in Mayopoulos’s position as General Counsel of the Bank, even though Moynihan had not practiced for years and his bar membership was not then even active.
So, according to the evidence developed by the SEC, Mayopoulos was fired not by reason of his performance, loyalty, or competence, but simply to make room for an officer that Lewis was prepared to lose but the Board of Directors of the Bank wanted to retain.
B. Cuomo’s Office’s Response
By its letter dated February 16, 2010 to the SEC, Cuomo’s office rejected the Commission’s request to turn over transcripts of the testimony of Mayopoulos and others given by them to Coumo’s office. Coumo's office stated that turning over such materials would adversely affect that office’s prosecution of its case against the Bank, Lewis, and Joe Price, the Bank’s former CFO.
In response to this letter, Judge Rakoff jumped in with his Order of February 17, stating his desire to see the requested materials to enable him to determine “whether the conclusions on which the S.E.C. premises its proposed settlement have an adequate basis in fact or are materially at variance with other sworn testimony.” Order at 2. Given the time constraints, the Judge simply requested that Cuomo’s office “voluntarily” produce the materials to the Court, suggesting that if Cuomo’s office deemed it necessary, the production could be made “ex parte,” meaning to the Court alone, without copying the SEC or BofA.
Cuomo’s office took up the suggestion and submitted the materials ex parte to the Court by its letter dated February 19.
C. BofA’s Response
BofA initially responded to Judge Rakoff’s Order of February 11 by its letter to the Court of February 16. Barely disguising its irritation, the Bank “respectfully” pointed out to Judge Rakoff that the second proposed settlement “was the result of arm’s length negotiations” between BofA and the Commission and, in the opinion of the Bank, “no changes” were necessary to the proposed consent judgment submitted by the Commission and the Bank to the Court. Nevertheless, the Bank stated its agreement to the Judge’s request for Commission and, possibly, Court involvement in the appointment of an independent auditor to assess the Bank’s disclosure controls and procedures and the retention of disclosure counsel for BofA’s audit committee.
But the Bank balked at Judge Rakoff’s request that the Commission and the Court participate in the selection of an independent compensation consultant for the Board’s compensation committee. The consent judgment submitted by the SEC and the Bank provides for the retention of an independent compensation consultant by the compensation committee, to be selected solely by the compensation committee. The Judge requested in his February 11 order that the consultant be acceptable to both the SEC and the Court and that, if the Bank and the SEC could not agree on the consultant, the Court would make that choice. That request irritated the Bank:
“. . . we do not believe that the third proposed change to the Consent Judgment is necessary to achieve or tailored to the remedial objectives of the settlement, and we further believe that this proposed change would impose on the SEC a substantive role that the SEC expressly does not seek and that is outside the province of the SEC and the Court.”
BofA letter of February 16, at 3 (footnote omitted).
In response to Cuomo’s office’s turning over materials, ex parte, to the Court, the Bank submitted its letter of February 18 in protest. The Bank’s position is that evidence developed in other forums and not in the pending actions against the Bank before Judge Rakoff should not be considered by the Court. This is not a frivolous complaint, and could serve as the basis for any appeal by the Bank to Judge Rakoff’s decision on the settlement, assuming he does not approve it.
____________________
If Judge Rakoff does not approve the second settlement, he will certainly confirm his reputation as a maverick. Without familiarity with the procedural hurdles that might confront the Commission or the Bank in challenging any rejection of the settlement by the Judge, one would think that if he rejects the settlement one or both of the parties will seek review of his decision by the Second Circuit and/or seek to disqualify Judge Rakoff from presiding over the trial of this case. It is not too much to ask how Judge Rakoff could maintain his impartiality if, as a result of his detailed review of deposition transcripts and other evidence, he concludes that the settlement should be rejected because the Commission has failed to name officers of the Bank and/or its counsel for securities law violations.
Friday, February 12, 2010
SEC v. Bank of America Corp.; The SEC and BofA Enter Into a Second Settlement; The Cuomo NY State Action
The Commission and BofA are headed back to Judge Rakoff for approval of a second settlement after their first settlement was rejected by the Judge on September 14, 2009. From my initial reading of the terms of the settlement and the supporting papers filed by the SEC in support of the settlement, I concluded that it was highly likely the Judge would approve it on this second go-round. Then I read Attorney General Cuomo’s complaint of February 4, 2010 filed against BofA and its two principal officers, Ken Lewis (CEO) and Joe Price (CFO), in New York State Supreme Court (New York’s trial court) and I am not so sure. Cuomo’s complaint, which reads more like a brief for summary judgment than a complaint, contains extensive quotations and summaries of testimony and emails and gets the blood flowing. Judge Rakoff obviously has read it, because, as was apparent from the preliminary hearing he held on Monday, February 8, 2010, the Judge commented to counsel for the Commission and BofA that he found the $150 million civil penalty “still quite small,” questioned whether there should be court supervision of certain prophylactic aspects of the settlement, and questioned the Commission’s summary of evidence in support of the settlement in light of the even more extensive recitation of facts (albeit in the form of allegations) in Cuomo’s complaint. See New York Times, Tuesday, February 9, 2010, page B7, col. 2.
So while I still would hazard that Judge Rakoff is likely to approve the second settlement, the fireworks on this one are not over, and Cuomo’s allegations are often stunning and sure to prove discomforting to many of BofA’s senior officers and its counsel.
A. The Second Settlement
The civil penalty of $150 million agreed to by BofA in the second settlement is some five times the fine of $33 million in the August 2009 settlement rejected by the Judge. This is real money, particularly in light of the relevant statutory standards I addressed in my post of September 25, 2009, but a relative pittance compared to BofA’s historical earnings: for the five years ended December 31, 2008, BofA reported average annual net income, after taxes, of $14.1 billion, of which $150 million represents a scant 1.1%.
BofA also agrees to implement, for a period of three years, prophylactic measures designed to enhance its financial reporting and its compensation practices, and to grant shareholders a say in its compensation policies. These measures include auditor certification of the Bank’s disclosure controls and procedures in addition to the attestation now required by SOX § 404 for the Bank’s internal controls and procedures for financial reporting; CEO and CFO certifications of its proxy statements comparable to those now required of the Bank’s 10-Ks and 10-Qs; appointment of separate disclosure counsel for the audit committee of its board of directors; adoption of independence requirements for the members of its compensation committee comparable to those that apply to its audit committee; retention of an independent compensation consultant to be engaged by and to report solely to the compensation committee; institution and implementation of formal written incentive compensation principles and processes, to be amended only after seeking a separate advisory shareholder vote; and provision of a separate advisory shareholder vote at each annual meeting involving the election of directors regarding the Bank’s compensation of its executives. These measures would push BofA to the forefront of “best practices” in its shareholder reporting and provide gainful, and the emphasis is on “gainful,” employment for scores of lawyers, accountants, and compensation consultants.
To address Judge Rakoff’s concern that the $33 million fine imposed by the August 2009 settlement would be borne by the “innocent” victims of BofA’s failure to disclose its agreement with Merrill in its merger proxy statement to allow Merrill to pay up to $5.8 billion in incentive bonuses to its employees for 2008, this second settlement provides for the distribution of the penalty “solely” to the “harmed” BofA shareholders. The fund is to be distributed pursuant to a plan to be subsequently proposed by the Commission and approved by the Court under the provisions of Section 308(a) of SOX. Presumably those shareholders “harmed” by the Bank’s disclosure failures will not include any Merrill shareholders who received BofA stock in the merger.
In support of the settlement, the Commission has filed a 35-page “Statement of Facts” detailing relevant facts established by the evidence obtained by the Commission in discovery after Judge Rakoff’s September 14, 2009 rejection of the first settlement. In a written consent filed with the supporting papers, the Bank “acknowledges that there is an evidentiary basis for the statements in the Statement of Facts ….” Consent of Bank of America Corporation, dated February 1, 2010, ¶ 14. The Bank has further agreed “not to take any action or to make or permit to be made any public statement denying, directly or indirectly, the statements in the Statement of Facts or any allegation in the complaints filed in the Actions or creating the impression that the statements in the Statement of Facts or the allegations in the complaints are without factual basis.” Id. The SEC’s Statement is meticulous in its citation to the sources for each of the statements of fact made. It is safe to say that the Statement reflects the input of BofA’s counsel, as it includes statements (often in footnotes) that this commentator considers reflective of BofA’s defenses.
1. No “Bad Boy” Taint
In the August 2009 settlement rejected by Judge Rakoff, the Bank agreed not only to the payment of a civil penalty in the amount of $33 million, but also to the inclusion in the final judgment of a permanent injunction enjoining the Bank from violating Section 14(a) of the Exchange Act and Rule 14a 9 promulgated by the SEC thereunder, the proxy statement anti-fraud prohibition.
Presumably in exchange for the prophylactic covenants the Bank has agreed to in this settlement, the Commission sets forth no such injunction in this second settlement. That omission is a significant victory for the Bank. Under the SEC’s rules, an “ineligible issuer” is not entitled to use certain procedures and forms that allow it to access the capital markets quickly and efficiently. An institution such as BofA uses these procedures and forms every day. An ineligible issuer includes any issuer that, within the past three years, has been the subject of any judicial or administrative decree or order arising out of a governmental action that, among other things, “[r]equires that the person cease and desist from violating the anti-fraud provisions of the federal securities laws ….” SEC Rule 405 (definition of “ineligible issuer”). The omission of any injunction in this second settlement prohibiting the Bank from violating the proxy statement anti-fraud provisions of the Exchange Act is a significant win for the Bank.
2. Why BofA Excluded Mention of its Agreement for the Payment of Merrill’s Q4 2008 Bonuses from its Proxy Statement
Several of my earlier posts focused on the likely explanation for BofA’s omission from its proxy statement of its agreement with Merrill (contained in a schedule to the merger agreement) that Merrill could pay up to $5.8 billion in year-end bonuses to Merrill’s officers and employees. The SEC’s Statement of Facts discloses that the language of the schedule, permitting the payment of up to $5.8 billion in discretionary year-end bonuses, continued to be negotiated “through October 21, 2008,” Statement ¶ 39, over a month after the merger was announced and the merger agreement filed with the SEC (the schedule is an attachment, albeit not publicly filed, to the merger agreement).
Why was the agreement set out in the schedule with respect to the payment of year-end bonuses not mentioned in the merger proxy statement? The Commission summarizes the deposition testimony of Jeannemarie O’Brien, the Wachtell partner who was responsible for the employee benefits provisions of the merger agreement and their disclosure in the proxy statement, who provided this answer:
“According to O’Brien, the provision in the Schedule did not have to be disclosed because, she believed, the [bonus] awards that Merrill was authorized to pay under Section 5.2 to the Schedule were not special transactional bonuses and were regular year-end bonuses consistent with the prior year.”
Statement ¶ 40.
This explanation doesn’t make sense in the context of the actual language of the forbearance provision of the merger contract, which provided that Merrill would not, without the prior written consent of the Bank, “pay any amount to [directors, officers or employees] not required by any current plan or agreement (other than base salary in the ordinary course of business).” Merger Agreement § 5.2(c). Nevertheless, what the Commission obviously found persuasive is the uniform testimony of the Bank’s executives “that they generally relied on Wachtell Lipton for the accuracy, completeness, and legal compliance of the Bank’s proxy disclosures.” Statement ¶ 40.
The Commission’s Statement concludes in rather stark fashion, highlighting the bonuses actually paid by Merrill in December 2008, after the shareholders of BofA had approved the merger. These bonuses totaled $3.62 billion, paid by a company, Merrill, that reported a net loss of $15.3 billion for the fourth quarter of 2008 and a net loss of $27 billion for all of 2008:
“Approximately 39,400 employees at Merrill Lynch received [bonus] awards. . . . Merrill paid year-end bonuses for 2008 of $1 million or more to nearly 700 employees, $5 million or more to over 50 employees, and $10 million or more to over 10 employees. . . . Among those who received year-end bonuses for 2008 at Merrill were employees who were not retained after the closing of the merger.”
Statement ¶ 49.
B. Cuomo’s Complaint
While the papers filed by the Commission in support of its second settlement with the Bank have the tenor one would expect from a Commission filing, particularly one negotiated with the defendant — staid, measured, and largely colorless — Attorney General Cuomo’s complaint filed against the Bank and its two principal officers, Ken Lewis and Joe Price, is anything but: it is hard-hitting, colorful, and dramatically lays out facts it alleges justify a finding of fraudulent practices engaged in by the defendants. From the Commission’s papers we get firmness but civility; from Cuomo we get a Bronx cheer. And one thing is for certain, Cuomo’s complaint has caused and will cause the Commission and the Bank massive heartburn.
1. Treatment of the Bank’s Failure to Disclose Merrill’s Fourth Quarter Losses
A good illustration of the dramatically different pictures painted by the Commission and Cuomo’s office from the same facts is their treatment of BofA’s failure to disclose Merrill’s fourth quarter losses prior to the special meeting of the Bank’s shareholders held on December 5, 2008 to approve the Merrill merger. For the third quarter of 2008, ended September 30, Merrill reported net losses of $5.2 billion. This figure was publicly reported and incorporated by reference into the proxy statement distributed to the Bank’s shareholders in connection with the merger. Between the third quarter and the date of the meeting, December 5, Merrill incurred net losses of in excess of $7.5 billion, which were not disclosed by the Bank to its shareholders even though the Bank was well aware of them. It was this failure that triggered the Commission to file its second complaint against the Bank, on January 12, 2010, which complaint is also being resolved by the second settlement.
After announcement of the proposed merger on September 15, 2008, the Bank sent hundreds of employees to Merrill’s offices in New York to facilitate the anticipated merger. BofA’s Chief Accounting Officer, Neil Cotty, even moved into an office at Merrill’s headquarters. The Bank received daily reports of Merrill’s financial results. It learned shortly after October 31, 2008 that Merrill had incurred losses before taxes of $6.1 billion for October (and net losses of $4.5 billion). The $4.5 billion monthly net loss almost equaled the $5.2 billion loss that Merrill had reported for the entire third quarter of 2008. When Cotty learned of this loss, he forwarded an email to Joe Price that noted: “Read and weep.” SEC Statement ¶ 15.
After learning of the October 2008 loss, Price sought the advice of the Bank’s general counsel, Timothy Mayopoulos, on the Bank’s disclosure obligations. Here is how the SEC describes the deliberations conducted by Mayopoulos with the Bank’s outside counsel, Wachtell Lipton, and Bank executives (the Bank waived the attorney-client privilege thereby permitting such inquiries on October 12, 2009):
“Over the next several days, Mayopoulos, Price, and other executives and in-house attorneys at Bank of America conferred amongst themselves as well as with Edward Herlihy, Nicholas Demmo and other attorneys at Wachtell Lipton to determine whether a disclosure was required in light of the forecasted $5 billion quarterly loss at Merrill. . . . Notes of a Wachtell Lipton attorney reflect that the initial view of the lawyers on November 13 was that there should be some additional disclosure. . . . Thereafter, the attorneys and executives reviewed and analyzed, among other materials, Merrill’s results in the preceding six quarters, analyst estimates for Merrill’s results in the fourth quarter, as well as the Proxy Statement and other recent Bank of America and Merrill public filings that were available to shareholders. . . . On November 20, the lawyers concluded that no additional disclosure was required. . . . Price informed Lewis of the conclusion reached by the lawyers.”
Statement ¶ 18 (record citations and footnote omitted).
Contrast this rather antiseptic description with the recitation found in Cuomo’s complaint. Cuomo alleges that Mayopoulos’ initial reaction was that the Merrill losses ought to be disclosed: ‘[m]y reaction was that $5 billion is a lot of money, and I believe my initial reaction was that a disclosure was likely warranted.’” Complaint ¶ 75. The Complaint details the conversations Mayopoulos had with Wachtell partners concerning disclosure of the anticipated fourth quarter losses, including reciting from counsel’s notes (Wachtell obviously joined BofA and waived its attorney work product privilege). At a November 13, 2008 conference call that Mayopoulos held with Ed Herlihy, Eric Roth, and Nick Demmo of Wachtell, the Complaint alleges that “[d]uring this meeting, the parties agreed disclosure was the proper course, and they discussed both the disclosure’s content and the date of disclosure.” Complaint ¶ 82.
After the November 13th meeting, Mayopoulos reconsidered his conclusion on the disclosure of the anticipated fourth quarter 2008 Merrill losses. He concluded, based upon Merrill’s reported quarterly losses since the fourth quarter of 2007, ranging from $2 billion to $10 billion, that disclosure of the anticipated $5 billion fourth quarter loss (Mayopoulos, based on his conversations with other Bank executives, had concluded that November 2008 would be flat for Merrill) was not necessary, as it would “be well within the range of prior experience at Merrill Lynch, and that investors, based on that, would not be surprised by that result.” Complaint ¶ 86. He reached this conclusion notwithstanding that, as the SEC recounts, analysts covering Merrill issued reports after Merrill’s reported Q3 2008 net loss of $5.2 billion that projected that Merrill’s fourth-quarter performance would be an improvement over the third quarter, with some projecting that Merrill would report income and others reporting much more modest losses. Statement ¶ 13. Indeed, even Ken Lewis and Joe Price expected Merrill to break even in the fourth quarter. Id.
The last that Mayopoulos conferred with Wachtell about disclosure was November 20, 2008. Here is what Cuomo alleges about that conference call:
“Significantly, Wachtell played a limited role on the question by this time. After their original conclusion [from November 13] was disregarded, Wachtell lawyers took themselves out of the equation, doing no substantive work, and in fact simply agreeing with Mayopoulos. They issued no memoranda or work product and they did no further research. Herlihy testified that Mayopoulos ‘had done a lot of homework and thought it through and so had come to some conclusion with respect to the disclosure.’
Neither Wachtell nor the Bank ever consulted Roth [a Wachtell partner] again on the question. Roth was the lawyer closest to the issues involved in disclosure. He was the lawyer most involved in the analysis of the question, as the only one who had done any research in the area or talked to other lawyers about the litigation of such questions. He was left to think that disclosure would be made:
Question: So what was your understanding of what was going to happen on November 13, 2008 when that conversation ended?
Roth: My sense was that as of the close of that meeting the view was that some kind of trend disclosure would be made — or at least that was the recommendation that was being made to the business people. I have no reason to believe the business people wouldn’t agree with the lawyers’ advice — and that Price would go talk to the senior executives of Merrill about the concept.
But after November 13, he was no longer involved, except to hear that the trend disclosure was never made:
Question: What is the next thing that happened with respect to the disclosure of the Merrill Lynch loss issue after November 13, 2008?
Roth: In terms of what I did [on disclosure], I had no involvement in the consideration or discussion of this issue after November 13 and prior to January 15 with the client. [...] I believe that at some point prior to January 16 I had a conversation with Ed Herlihy where I inquired after the trend disclosure and what had happened. [ ... ]
Question: What did Mr. Herlihy say?
Roth: He told me […] that the client had decided that it was not necessary for the companies to make that disclosure.”
Complaint ¶¶ 92-93.
The contrast between the Commission’s treatment of BofA’s solicitation of Merrill’s advice on the disclosure of Merrill’s fourth-quarter losses was also dramatic. After the November 13, 2008 conference call Mayopoulos had with the Wachtell lawyers, it was agreed that Price would contact Merrill’s CEO, Thain, concerning disclosure of Merrill’s fourth-quarter losses. As described by the SEC: “Price also approached Thain and Nelson Chai, Merrill’s then-Chief Financial Officer, to suggest that a disclosure may be required. Thain and Chai rejected the suggestion, suggesting that Merrill ordinarily did not provide shareholders with interim disclosure in the middle of a quarterly period.” Statement ¶ 17.
Here is how Cuomo describes Price’s approach to Thain and Chai:
“Although, as Roth’s notes reflect, Price was to ‘engage’ Merrill Lynch, instead he [Price] avoided the issue by watering it down to a mere question. On November 14, Price met with Thain, Cotty [BofA’s Chief Accounting Officer], Chai and Hayward [Merrill’s Finance Director] at Merrill’s New York offices to analyze Merrill’s assets and financial condition. Price did not act on Mayopoulos’ advice to tell Thain that Bank of America would be disclosing Merrill losses. Rather, he merely asked Thain and Chai if Merrill would be making any disclosures regarding Merrill’s fourth quarter losses. Price recalled that he ‘asked that they assess any potential need to early disclose financial results and we would do the same, it would come back together.’
Hayward explained that there was only ‘a very short comment from Joe Price to the effect — not verbatim, but to the effect — does Merrill plan to do any intra-quarter disclosure, and John [Thain] responded, No, we don’t provide intra-quarter guidance, had not been doing that all year and didn’t plan to.’”
Complaint ¶¶ 83-84.
On December 3, 2008, just two days before the shareholder vote on the merger, by which time the fourth quarter loss was projected to be $8.9 billion, the SEC, in a footnote in its Statement, notes that Jeffrey Brown, the Bank’s Treasurer, raised with Price “the possibility of disclosing Merrill’s fourth quarter losses; after Price advised Brown that he had consulted the Bank’s attorneys on the issue, Brown suggested that, as a practical matter, disclosure may be advisable.” Statement ¶ 18, note 5.
Cuomo’s description of the interaction is more dramatic:
“Corporate treasurer Jeffrey Brown became concerned about the mounting losses at Merrill and the devastating effect they would have on the Bank of America shares he and others held. As he put it,
Associates are shareholders, as well. We had paid a lot for Merrill Lynch, and we were also watching before our eyes their financial condition deteriorate. You knew that there was likely to be adverse impacts to the share price, and that wasn’t necessarily a good thing as a shareholder.
Brown voiced this concern to Price before the shareholder vote, saying that he believed the losses ought to be disclosed to shareholders. Brown told Price that ‘I felt that we should disclose; that the losses were meaningful enough.’ He explained that ‘at this point it’s about a $9 billion after tax number. That’s a fairly significant loss for a corporation to experience in one quarter, and withholding that could potentially result in items like we’re discussing today [in his deposition].’ After Price dismissed Brown’s concerns, Brown offered an unforgettable warning: ‘I stated to Mr. Price that I didn’t want to be talking through a glass wall over a telephone.’”
Complaint ¶¶ 137-138.
2. Mayopoulos’ Firing
One of the areas Judge Rakoff showed an interest in at the hearing on the second settlement held February 8, as reported by the New York Times, was the firing of general counsel Mayopoulos. The SEC does not mention the firing at all in its Statement of Facts or its supporting papers. While its relevance is not clear, the recitation of the firing in Cuomo’s complaint adds to the drama of the tale it relates. As indicated above, Mayopoulos played the good trooper in his revised conclusion that disclosing Merrill’s anticipated fourth quarter losses in the Bank’s proxy statement was not necessary since they were within the range (as he then understood the actual losses after September 30, 2008) of Merrill’s quarterly losses reported since the fourth quarter of 2007. Mayopoulos had also been consulted by Price and Greg Curl, the Bank’s Vice Chairman of Corporate Development (and lead negotiator for the Bank on the Merrill merger) on whether, in light of Merrill’s fourth quarter losses, the Bank might invoke the “MAC” (material adverse change) clause of the merger agreement and back out of the merger. Mayopoulos advised that successfully invoking the MAC clause was unlikely.
After the merger, the Bank’s board met on December 9, 2008. Price reported to the board that Merrill’s projected net loss for the fourth quarter of 2008 was now $9 billion, some $2 billion higher than Price had previously told Mayopoulos was the expected fourth quarter loss. Right after the December 9 board meeting, Mayopoulos sought out Price to discuss the higher figure. Price was unavailable, so Mayopoulos planned to talk to him the following day with his question. Here is how Cuomo details Mayopoulos’ firing:
“Thus on the evening of December 9, Mayopoulos knew too much: first, that he had been approached before the shareholder meeting about the MAC; second, that on December 3, prior to the shareholder vote, he was told losses were only $7 billion after tax, and third, he now knew that by that time the losses had been at least $9 billion.
The next day, December 10, without any warning, Mayopoulos was told his employment had been terminated, and he was immediately escorted from the premises by an HR executive. He was not permitted to remove any belongings, even personal effects.
. . . .
Bank of America thus fired its General Counsel in the middle of a historic financial crisis, and in the course of the most significant acquisition in its corporate life. As Mayopoulos recalled in his congressional testimony,
I was stunned. I had never been fired from any job, and I had never heard of the general counsel of a major company being summarily dismissed for no apparent reason and with no explanation.
[…]
Finally, I could not understand why I was dismissed so abruptly. I was surprised that I was given no opportunity to say goodbye to my colleagues and staff, and why there was no orderly transition of my work to Mr. Moynihan. [Brian Moynihan, then head of the Bank’s Global Corporate Investment Bank and now CEO of the Bank.] No one, including Mr. Moynihan, ever contacted me to discuss what I had been working on. Nearly a year later, I still do not know why I was terminated, who was involved in the decision to do so, or what their reasons or motivations were.”
Complaint ¶¶ 156-157, 161.
3. The Bank Extracts $20 Billion from the Government
A good portion of Cuomo’s complaint is devoted to the Bank’s allegedly fraudulent extraction of $20 billion from the Government to support the Merrill merger. The thrust of the allegations is that the Bank, Lewis, and Price falsely claimed to Treasury Secretary Paulson and Fed Chairman Bernanke that the Bank could back out of the merger by reason of the MAC clause, due to the unanticipated losses suffered by Merrill during the fourth quarter of 2008, and that it could only proceed with the merger with taxpayer assistance. The detailed allegations make for fascinating reading, and certainly do not cast a favorable light on Lewis, Price, or counsel, but the relevance of the allegations is not entirely clear, given that neither Paulson nor Bernanke was fooled — they saw the argument as a negotiating tactic and probably without foundation — and, as we now know, the Bank in December 2009 repaid not only the $20 billion the Government invested in the Bank to assist with the Merrill merger but also the other $25 billion in TARP monies invested by the Government in the Bank.
But here is some of the gory detail.
The thrust of Cuomo’s allegations, which do serve to emphasize the weakness of the Bank’s position in failing to disclose Merrill’s fourth quarter losses to its shareholders prior to the shareholder vote, is that the Bank tried to use the very same losses that it concluded were not necessary to disclose to its shareholders as grounds for claiming Merrill had suffered a “material adverse change” and therefore would be justified in backing out of the merger! As Cuomo alleges:
“Thus, only the remaining $1.4 billion represented losses incurred after the shareholder vote but prior to December 12 [when the Bank embarked on MAC discussions with the Government]. In other words, BoA management sought taxpayer aid to save the Bank on a figure that was in reality only $1.4 billion worse than the losses they concealed from shareholders voting on the Merrill acquisition. Their action demonstrates, perhaps more clearly than any other fact, the materiality of the pre-vote losses, and BoA management’s obligations to disclose them.”
Complaint ¶¶ 167 (emphasis in original).
Moreover, both the Bank’s general counsel, Mayopoulos (by now having been fired), and the Wachtell firm advised the Bank against invoking the MAC clause. In another illustration of why it is never a good idea to waive the attorney-client or attorney work product privileges, Cuomo details Wachtell’s advice on the MAC clause to the Bank:
“Wachtell concluded right away that invoking the MAC clause would likely fail, and worse, could put the Bank at huge risk of being forced to purchase a bankrupted Merrill Lynch. On December 14, Roth took notes of a conversation with Demmo [another Wachtell partner] in which he noted ‘If we call the MAC company = bankrupt damage = huge,’ which he testified meant that ‘given the state of the financial markets, just the assertion that Merrill had suffered a MAC would probably result in counterparties refusing to deal with Merrill, and, as we saw with Lehman, it may not survive a day.’ The notes also reflect that the initial thinking included government aid: ‘Go to gov’t to share pain? Get addl cap.’ Roth testified that this note reflected Demmo’s thinking ‘that one possible course of action to consider would be the prospect of going to the government and getting some form of assistance.’ Moynihan likewise testified that going into the meetings with the federal officials, a potential solution to the situation was obtaining government aid.”
Complaint ¶ 182.
Demonstrating the dexterity lawyers are capable of, Wachtell’s advice to its client did not prevent it from forcibly arguing to the Government that the Bank could successfully invoke the MAC clause with Merrill and back out of the deal:
“The very lawyers who concluded that a MAC claim would be futile and disastrous argued forcefully to federal officials that a MAC case would be successful. Brenner [the Bank’s Associate General Counsel] described the December 19 meeting [with Paulson and Bernanke] to Moynihan as follows:
Eric [Roth] made a very strong case as to why there is a MAC. All questions (other than one) came from Tom Baxter at the NY Fed and focused on the case law around MAC. Since Eric or Peter [Hein] [of Wachtell] were involved in each case Tom cited, no line of questioning evolved very well for Tom. Tom observed there had never been a successful MAC case before, and Eric responded that all cases are factually based, and this one essentially could be the first due to magnitude and duration of future lost earnings.
In other words, even though it knew a MAC claim was out of the question, the Bank threatened federal officials that it would make one anyway, in order to get taxpayer aid.”
Complaint ¶ 200.
C. Thain’s Reputation Restored?
John Thain should thank Judge Rakoff for his rejection of the August 2009 settlement between the SEC and BofA. As a result of the rejection, the Commission was forced to develop and disclose the record of the deal and the negotiations conducted between the parties in connection with the merger. That record establishes that Merrill (and Thain) did not conceal relevant information concerning the payment of 2008 fourth quarter bonuses to Merrill’s employees or the losses incurred by Merrill for the fourth quarter of 2008.
Lewis fired Thain on January 22, 2009. The firing, widely reported, came in a visit Lewis paid to Thain in New York, and was delivered in a meeting that lasted less than 15 minutes. Officially, all that the Bank stated, in its press release announcing Thain’s departure, was that he was “leaving the company.” Most of the release was devoted to Moynihan’s elevation to President of Global Banking and Global Wealth and Investment Management (replacing Thain). (Moynihan would eventually replace Lewis as CEO of the Bank in December 2009.)
The dirt came in the press reports, which obviously relied upon Bank representatives for their information. Thus, the New York Times, in its report on the termination of January 23, 2009, noted that despite Merrill’s mounting losses over the fourth quarter, it “rushed to pay annual bonuses to its employees before its deal with Bank of America closed on Jan. 1.” While noting that Merrill did alert the Bank in “mid-December” that its losses were ballooning, the Times reported that “Mr. Lewis did not hear the news from Mr. Thain, who around that time left for a skiing trip at his second home in Vail, Colo.” Ouch!
Another reason for the termination, reported the Times, “may have been the decision by Mr. Thain to make an earlier-than-usual bonus payout to Merrill employees, just three days before the merger closed, and before Bank of America could do anything to prevent it.” Thain, following corporate etiquette, “declined through a spokeswoman to comment on whether he had misrepresented Merrill’s risks at the time of the merger.”
But, as the SEC’s Statement of Facts (for which BofA formally acknowledged there was “an evidentiary basis”) and Cuomo’s Complaint make clear, the Bank was well aware of Merrill’s mounting losses during the fourth quarter of 2008 (on a daily basis), agreed with Merrill that it could pay up to $5.8 billion in bonuses for 2008, and was aware of and did not object to the payment of the bonuses actually awarded prior to year end. SEC Statement ¶¶ 33, 39-40, 47; Complaint ¶¶ 236-40.
This is not to say that Thain’s termination was not inevitable. The captain goes down with the sinking ship. With its massive fourth quarter 2008 losses and the outrage that greeted its payment of billions in bonuses, it is no surprise that Lewis “suggested” Thain leave the combined company. What is clear is that the request was not prompted by any failure of disclosure by Merrill or Thain to BofA.
D. What Will Judge Rakoff Do?
As indicated, on Monday, February 8, Judge Rakoff held a preliminary hearing on the second settlement, and, in his fashion, voiced some skepticism. The Judge has now issued his order, on February 11, requesting additional information and certain clarifications concerning this second settlement. This one is not over.
First, for the easy part: the Judge requests the parties to indicate whether they would agree to modifications of the prophylactic provisions of the settlement to permit Court intervention if the parties (the SEC and the Bank) do not agree on the appointment of (i) the independent auditor to conduct the disclosure controls and procedures certification, (ii) disclosure counsel to be retained by the audit committee, or (iii) the independent compensation consultant to be retained by the compensation committee of the BofA board of directors. In any such instance, Judge Rakoff is suggesting the prophylactic provisions be modified to permit the Court to make the choice if the parties are unable to do so. I would anticipate that neither the Commission nor the Bank will have any objection to these suggested revisions to the prophylactic provisions of the settlement.
The Judge also requests clarification that the distribution of the $150 million civil fine not be made to “legacy Merrill Lynch” shareholders of the Bank, meaning those formerly Merrill shareholders who received BofA stock in the merger. No surprise here.
Where things get very dicey is with the Judge’s request for all underlying evidence for his review on the following matters:
• The Mayopoulos termination;
• Wachtell Lipton’s participation, if any, in the “evaluation of the disclosure issues raised by the reports of increased losses at Merrill Lynch & Co.”;
• All recommendations that the Bank disclose Merrill’s fourth quarter 2008 losses, including any from Mayopoulos, Wachtell Lipton, Merrill’s auditors, BofA’s “corporate treasurer,” or anyone else; and
• Similar information as to disclosure of the agreement reached by the Bank and Merrill vis รก vis the payment of 2008 bonuses.
The Judge asks for the underlying evidence relating to the above-referenced matters, requesting that the parties “jointly and severally” arrange the evidence in accordance with the Judge’s listing of the topics he is interested in. He does not call for any argument on the question he is obviously interested in, namely, whether there is any culpability by any individuals for the alleged disclosure violations by the Bank.
The order requires the parties to make their submissions to the Court by no later than 5 p.m. on Tuesday, February 16, 2010. There goes the Presidents’ Day holiday for counsel to the Commission and the Bank. It is safe to say they must all be muttering under their breath about their blown weekend and what Judge Rakoff is up to.
We shall soon see.
So while I still would hazard that Judge Rakoff is likely to approve the second settlement, the fireworks on this one are not over, and Cuomo’s allegations are often stunning and sure to prove discomforting to many of BofA’s senior officers and its counsel.
A. The Second Settlement
The civil penalty of $150 million agreed to by BofA in the second settlement is some five times the fine of $33 million in the August 2009 settlement rejected by the Judge. This is real money, particularly in light of the relevant statutory standards I addressed in my post of September 25, 2009, but a relative pittance compared to BofA’s historical earnings: for the five years ended December 31, 2008, BofA reported average annual net income, after taxes, of $14.1 billion, of which $150 million represents a scant 1.1%.
BofA also agrees to implement, for a period of three years, prophylactic measures designed to enhance its financial reporting and its compensation practices, and to grant shareholders a say in its compensation policies. These measures include auditor certification of the Bank’s disclosure controls and procedures in addition to the attestation now required by SOX § 404 for the Bank’s internal controls and procedures for financial reporting; CEO and CFO certifications of its proxy statements comparable to those now required of the Bank’s 10-Ks and 10-Qs; appointment of separate disclosure counsel for the audit committee of its board of directors; adoption of independence requirements for the members of its compensation committee comparable to those that apply to its audit committee; retention of an independent compensation consultant to be engaged by and to report solely to the compensation committee; institution and implementation of formal written incentive compensation principles and processes, to be amended only after seeking a separate advisory shareholder vote; and provision of a separate advisory shareholder vote at each annual meeting involving the election of directors regarding the Bank’s compensation of its executives. These measures would push BofA to the forefront of “best practices” in its shareholder reporting and provide gainful, and the emphasis is on “gainful,” employment for scores of lawyers, accountants, and compensation consultants.
To address Judge Rakoff’s concern that the $33 million fine imposed by the August 2009 settlement would be borne by the “innocent” victims of BofA’s failure to disclose its agreement with Merrill in its merger proxy statement to allow Merrill to pay up to $5.8 billion in incentive bonuses to its employees for 2008, this second settlement provides for the distribution of the penalty “solely” to the “harmed” BofA shareholders. The fund is to be distributed pursuant to a plan to be subsequently proposed by the Commission and approved by the Court under the provisions of Section 308(a) of SOX. Presumably those shareholders “harmed” by the Bank’s disclosure failures will not include any Merrill shareholders who received BofA stock in the merger.
In support of the settlement, the Commission has filed a 35-page “Statement of Facts” detailing relevant facts established by the evidence obtained by the Commission in discovery after Judge Rakoff’s September 14, 2009 rejection of the first settlement. In a written consent filed with the supporting papers, the Bank “acknowledges that there is an evidentiary basis for the statements in the Statement of Facts ….” Consent of Bank of America Corporation, dated February 1, 2010, ¶ 14. The Bank has further agreed “not to take any action or to make or permit to be made any public statement denying, directly or indirectly, the statements in the Statement of Facts or any allegation in the complaints filed in the Actions or creating the impression that the statements in the Statement of Facts or the allegations in the complaints are without factual basis.” Id. The SEC’s Statement is meticulous in its citation to the sources for each of the statements of fact made. It is safe to say that the Statement reflects the input of BofA’s counsel, as it includes statements (often in footnotes) that this commentator considers reflective of BofA’s defenses.
1. No “Bad Boy” Taint
In the August 2009 settlement rejected by Judge Rakoff, the Bank agreed not only to the payment of a civil penalty in the amount of $33 million, but also to the inclusion in the final judgment of a permanent injunction enjoining the Bank from violating Section 14(a) of the Exchange Act and Rule 14a 9 promulgated by the SEC thereunder, the proxy statement anti-fraud prohibition.
Presumably in exchange for the prophylactic covenants the Bank has agreed to in this settlement, the Commission sets forth no such injunction in this second settlement. That omission is a significant victory for the Bank. Under the SEC’s rules, an “ineligible issuer” is not entitled to use certain procedures and forms that allow it to access the capital markets quickly and efficiently. An institution such as BofA uses these procedures and forms every day. An ineligible issuer includes any issuer that, within the past three years, has been the subject of any judicial or administrative decree or order arising out of a governmental action that, among other things, “[r]equires that the person cease and desist from violating the anti-fraud provisions of the federal securities laws ….” SEC Rule 405 (definition of “ineligible issuer”). The omission of any injunction in this second settlement prohibiting the Bank from violating the proxy statement anti-fraud provisions of the Exchange Act is a significant win for the Bank.
2. Why BofA Excluded Mention of its Agreement for the Payment of Merrill’s Q4 2008 Bonuses from its Proxy Statement
Several of my earlier posts focused on the likely explanation for BofA’s omission from its proxy statement of its agreement with Merrill (contained in a schedule to the merger agreement) that Merrill could pay up to $5.8 billion in year-end bonuses to Merrill’s officers and employees. The SEC’s Statement of Facts discloses that the language of the schedule, permitting the payment of up to $5.8 billion in discretionary year-end bonuses, continued to be negotiated “through October 21, 2008,” Statement ¶ 39, over a month after the merger was announced and the merger agreement filed with the SEC (the schedule is an attachment, albeit not publicly filed, to the merger agreement).
Why was the agreement set out in the schedule with respect to the payment of year-end bonuses not mentioned in the merger proxy statement? The Commission summarizes the deposition testimony of Jeannemarie O’Brien, the Wachtell partner who was responsible for the employee benefits provisions of the merger agreement and their disclosure in the proxy statement, who provided this answer:
“According to O’Brien, the provision in the Schedule did not have to be disclosed because, she believed, the [bonus] awards that Merrill was authorized to pay under Section 5.2 to the Schedule were not special transactional bonuses and were regular year-end bonuses consistent with the prior year.”
Statement ¶ 40.
This explanation doesn’t make sense in the context of the actual language of the forbearance provision of the merger contract, which provided that Merrill would not, without the prior written consent of the Bank, “pay any amount to [directors, officers or employees] not required by any current plan or agreement (other than base salary in the ordinary course of business).” Merger Agreement § 5.2(c). Nevertheless, what the Commission obviously found persuasive is the uniform testimony of the Bank’s executives “that they generally relied on Wachtell Lipton for the accuracy, completeness, and legal compliance of the Bank’s proxy disclosures.” Statement ¶ 40.
The Commission’s Statement concludes in rather stark fashion, highlighting the bonuses actually paid by Merrill in December 2008, after the shareholders of BofA had approved the merger. These bonuses totaled $3.62 billion, paid by a company, Merrill, that reported a net loss of $15.3 billion for the fourth quarter of 2008 and a net loss of $27 billion for all of 2008:
“Approximately 39,400 employees at Merrill Lynch received [bonus] awards. . . . Merrill paid year-end bonuses for 2008 of $1 million or more to nearly 700 employees, $5 million or more to over 50 employees, and $10 million or more to over 10 employees. . . . Among those who received year-end bonuses for 2008 at Merrill were employees who were not retained after the closing of the merger.”
Statement ¶ 49.
B. Cuomo’s Complaint
While the papers filed by the Commission in support of its second settlement with the Bank have the tenor one would expect from a Commission filing, particularly one negotiated with the defendant — staid, measured, and largely colorless — Attorney General Cuomo’s complaint filed against the Bank and its two principal officers, Ken Lewis and Joe Price, is anything but: it is hard-hitting, colorful, and dramatically lays out facts it alleges justify a finding of fraudulent practices engaged in by the defendants. From the Commission’s papers we get firmness but civility; from Cuomo we get a Bronx cheer. And one thing is for certain, Cuomo’s complaint has caused and will cause the Commission and the Bank massive heartburn.
1. Treatment of the Bank’s Failure to Disclose Merrill’s Fourth Quarter Losses
A good illustration of the dramatically different pictures painted by the Commission and Cuomo’s office from the same facts is their treatment of BofA’s failure to disclose Merrill’s fourth quarter losses prior to the special meeting of the Bank’s shareholders held on December 5, 2008 to approve the Merrill merger. For the third quarter of 2008, ended September 30, Merrill reported net losses of $5.2 billion. This figure was publicly reported and incorporated by reference into the proxy statement distributed to the Bank’s shareholders in connection with the merger. Between the third quarter and the date of the meeting, December 5, Merrill incurred net losses of in excess of $7.5 billion, which were not disclosed by the Bank to its shareholders even though the Bank was well aware of them. It was this failure that triggered the Commission to file its second complaint against the Bank, on January 12, 2010, which complaint is also being resolved by the second settlement.
After announcement of the proposed merger on September 15, 2008, the Bank sent hundreds of employees to Merrill’s offices in New York to facilitate the anticipated merger. BofA’s Chief Accounting Officer, Neil Cotty, even moved into an office at Merrill’s headquarters. The Bank received daily reports of Merrill’s financial results. It learned shortly after October 31, 2008 that Merrill had incurred losses before taxes of $6.1 billion for October (and net losses of $4.5 billion). The $4.5 billion monthly net loss almost equaled the $5.2 billion loss that Merrill had reported for the entire third quarter of 2008. When Cotty learned of this loss, he forwarded an email to Joe Price that noted: “Read and weep.” SEC Statement ¶ 15.
After learning of the October 2008 loss, Price sought the advice of the Bank’s general counsel, Timothy Mayopoulos, on the Bank’s disclosure obligations. Here is how the SEC describes the deliberations conducted by Mayopoulos with the Bank’s outside counsel, Wachtell Lipton, and Bank executives (the Bank waived the attorney-client privilege thereby permitting such inquiries on October 12, 2009):
“Over the next several days, Mayopoulos, Price, and other executives and in-house attorneys at Bank of America conferred amongst themselves as well as with Edward Herlihy, Nicholas Demmo and other attorneys at Wachtell Lipton to determine whether a disclosure was required in light of the forecasted $5 billion quarterly loss at Merrill. . . . Notes of a Wachtell Lipton attorney reflect that the initial view of the lawyers on November 13 was that there should be some additional disclosure. . . . Thereafter, the attorneys and executives reviewed and analyzed, among other materials, Merrill’s results in the preceding six quarters, analyst estimates for Merrill’s results in the fourth quarter, as well as the Proxy Statement and other recent Bank of America and Merrill public filings that were available to shareholders. . . . On November 20, the lawyers concluded that no additional disclosure was required. . . . Price informed Lewis of the conclusion reached by the lawyers.”
Statement ¶ 18 (record citations and footnote omitted).
Contrast this rather antiseptic description with the recitation found in Cuomo’s complaint. Cuomo alleges that Mayopoulos’ initial reaction was that the Merrill losses ought to be disclosed: ‘[m]y reaction was that $5 billion is a lot of money, and I believe my initial reaction was that a disclosure was likely warranted.’” Complaint ¶ 75. The Complaint details the conversations Mayopoulos had with Wachtell partners concerning disclosure of the anticipated fourth quarter losses, including reciting from counsel’s notes (Wachtell obviously joined BofA and waived its attorney work product privilege). At a November 13, 2008 conference call that Mayopoulos held with Ed Herlihy, Eric Roth, and Nick Demmo of Wachtell, the Complaint alleges that “[d]uring this meeting, the parties agreed disclosure was the proper course, and they discussed both the disclosure’s content and the date of disclosure.” Complaint ¶ 82.
After the November 13th meeting, Mayopoulos reconsidered his conclusion on the disclosure of the anticipated fourth quarter 2008 Merrill losses. He concluded, based upon Merrill’s reported quarterly losses since the fourth quarter of 2007, ranging from $2 billion to $10 billion, that disclosure of the anticipated $5 billion fourth quarter loss (Mayopoulos, based on his conversations with other Bank executives, had concluded that November 2008 would be flat for Merrill) was not necessary, as it would “be well within the range of prior experience at Merrill Lynch, and that investors, based on that, would not be surprised by that result.” Complaint ¶ 86. He reached this conclusion notwithstanding that, as the SEC recounts, analysts covering Merrill issued reports after Merrill’s reported Q3 2008 net loss of $5.2 billion that projected that Merrill’s fourth-quarter performance would be an improvement over the third quarter, with some projecting that Merrill would report income and others reporting much more modest losses. Statement ¶ 13. Indeed, even Ken Lewis and Joe Price expected Merrill to break even in the fourth quarter. Id.
The last that Mayopoulos conferred with Wachtell about disclosure was November 20, 2008. Here is what Cuomo alleges about that conference call:
“Significantly, Wachtell played a limited role on the question by this time. After their original conclusion [from November 13] was disregarded, Wachtell lawyers took themselves out of the equation, doing no substantive work, and in fact simply agreeing with Mayopoulos. They issued no memoranda or work product and they did no further research. Herlihy testified that Mayopoulos ‘had done a lot of homework and thought it through and so had come to some conclusion with respect to the disclosure.’
Neither Wachtell nor the Bank ever consulted Roth [a Wachtell partner] again on the question. Roth was the lawyer closest to the issues involved in disclosure. He was the lawyer most involved in the analysis of the question, as the only one who had done any research in the area or talked to other lawyers about the litigation of such questions. He was left to think that disclosure would be made:
Question: So what was your understanding of what was going to happen on November 13, 2008 when that conversation ended?
Roth: My sense was that as of the close of that meeting the view was that some kind of trend disclosure would be made — or at least that was the recommendation that was being made to the business people. I have no reason to believe the business people wouldn’t agree with the lawyers’ advice — and that Price would go talk to the senior executives of Merrill about the concept.
But after November 13, he was no longer involved, except to hear that the trend disclosure was never made:
Question: What is the next thing that happened with respect to the disclosure of the Merrill Lynch loss issue after November 13, 2008?
Roth: In terms of what I did [on disclosure], I had no involvement in the consideration or discussion of this issue after November 13 and prior to January 15 with the client. [...] I believe that at some point prior to January 16 I had a conversation with Ed Herlihy where I inquired after the trend disclosure and what had happened. [ ... ]
Question: What did Mr. Herlihy say?
Roth: He told me […] that the client had decided that it was not necessary for the companies to make that disclosure.”
Complaint ¶¶ 92-93.
The contrast between the Commission’s treatment of BofA’s solicitation of Merrill’s advice on the disclosure of Merrill’s fourth-quarter losses was also dramatic. After the November 13, 2008 conference call Mayopoulos had with the Wachtell lawyers, it was agreed that Price would contact Merrill’s CEO, Thain, concerning disclosure of Merrill’s fourth-quarter losses. As described by the SEC: “Price also approached Thain and Nelson Chai, Merrill’s then-Chief Financial Officer, to suggest that a disclosure may be required. Thain and Chai rejected the suggestion, suggesting that Merrill ordinarily did not provide shareholders with interim disclosure in the middle of a quarterly period.” Statement ¶ 17.
Here is how Cuomo describes Price’s approach to Thain and Chai:
“Although, as Roth’s notes reflect, Price was to ‘engage’ Merrill Lynch, instead he [Price] avoided the issue by watering it down to a mere question. On November 14, Price met with Thain, Cotty [BofA’s Chief Accounting Officer], Chai and Hayward [Merrill’s Finance Director] at Merrill’s New York offices to analyze Merrill’s assets and financial condition. Price did not act on Mayopoulos’ advice to tell Thain that Bank of America would be disclosing Merrill losses. Rather, he merely asked Thain and Chai if Merrill would be making any disclosures regarding Merrill’s fourth quarter losses. Price recalled that he ‘asked that they assess any potential need to early disclose financial results and we would do the same, it would come back together.’
Hayward explained that there was only ‘a very short comment from Joe Price to the effect — not verbatim, but to the effect — does Merrill plan to do any intra-quarter disclosure, and John [Thain] responded, No, we don’t provide intra-quarter guidance, had not been doing that all year and didn’t plan to.’”
Complaint ¶¶ 83-84.
On December 3, 2008, just two days before the shareholder vote on the merger, by which time the fourth quarter loss was projected to be $8.9 billion, the SEC, in a footnote in its Statement, notes that Jeffrey Brown, the Bank’s Treasurer, raised with Price “the possibility of disclosing Merrill’s fourth quarter losses; after Price advised Brown that he had consulted the Bank’s attorneys on the issue, Brown suggested that, as a practical matter, disclosure may be advisable.” Statement ¶ 18, note 5.
Cuomo’s description of the interaction is more dramatic:
“Corporate treasurer Jeffrey Brown became concerned about the mounting losses at Merrill and the devastating effect they would have on the Bank of America shares he and others held. As he put it,
Associates are shareholders, as well. We had paid a lot for Merrill Lynch, and we were also watching before our eyes their financial condition deteriorate. You knew that there was likely to be adverse impacts to the share price, and that wasn’t necessarily a good thing as a shareholder.
Brown voiced this concern to Price before the shareholder vote, saying that he believed the losses ought to be disclosed to shareholders. Brown told Price that ‘I felt that we should disclose; that the losses were meaningful enough.’ He explained that ‘at this point it’s about a $9 billion after tax number. That’s a fairly significant loss for a corporation to experience in one quarter, and withholding that could potentially result in items like we’re discussing today [in his deposition].’ After Price dismissed Brown’s concerns, Brown offered an unforgettable warning: ‘I stated to Mr. Price that I didn’t want to be talking through a glass wall over a telephone.’”
Complaint ¶¶ 137-138.
2. Mayopoulos’ Firing
One of the areas Judge Rakoff showed an interest in at the hearing on the second settlement held February 8, as reported by the New York Times, was the firing of general counsel Mayopoulos. The SEC does not mention the firing at all in its Statement of Facts or its supporting papers. While its relevance is not clear, the recitation of the firing in Cuomo’s complaint adds to the drama of the tale it relates. As indicated above, Mayopoulos played the good trooper in his revised conclusion that disclosing Merrill’s anticipated fourth quarter losses in the Bank’s proxy statement was not necessary since they were within the range (as he then understood the actual losses after September 30, 2008) of Merrill’s quarterly losses reported since the fourth quarter of 2007. Mayopoulos had also been consulted by Price and Greg Curl, the Bank’s Vice Chairman of Corporate Development (and lead negotiator for the Bank on the Merrill merger) on whether, in light of Merrill’s fourth quarter losses, the Bank might invoke the “MAC” (material adverse change) clause of the merger agreement and back out of the merger. Mayopoulos advised that successfully invoking the MAC clause was unlikely.
After the merger, the Bank’s board met on December 9, 2008. Price reported to the board that Merrill’s projected net loss for the fourth quarter of 2008 was now $9 billion, some $2 billion higher than Price had previously told Mayopoulos was the expected fourth quarter loss. Right after the December 9 board meeting, Mayopoulos sought out Price to discuss the higher figure. Price was unavailable, so Mayopoulos planned to talk to him the following day with his question. Here is how Cuomo details Mayopoulos’ firing:
“Thus on the evening of December 9, Mayopoulos knew too much: first, that he had been approached before the shareholder meeting about the MAC; second, that on December 3, prior to the shareholder vote, he was told losses were only $7 billion after tax, and third, he now knew that by that time the losses had been at least $9 billion.
The next day, December 10, without any warning, Mayopoulos was told his employment had been terminated, and he was immediately escorted from the premises by an HR executive. He was not permitted to remove any belongings, even personal effects.
. . . .
Bank of America thus fired its General Counsel in the middle of a historic financial crisis, and in the course of the most significant acquisition in its corporate life. As Mayopoulos recalled in his congressional testimony,
I was stunned. I had never been fired from any job, and I had never heard of the general counsel of a major company being summarily dismissed for no apparent reason and with no explanation.
[…]
Finally, I could not understand why I was dismissed so abruptly. I was surprised that I was given no opportunity to say goodbye to my colleagues and staff, and why there was no orderly transition of my work to Mr. Moynihan. [Brian Moynihan, then head of the Bank’s Global Corporate Investment Bank and now CEO of the Bank.] No one, including Mr. Moynihan, ever contacted me to discuss what I had been working on. Nearly a year later, I still do not know why I was terminated, who was involved in the decision to do so, or what their reasons or motivations were.”
Complaint ¶¶ 156-157, 161.
3. The Bank Extracts $20 Billion from the Government
A good portion of Cuomo’s complaint is devoted to the Bank’s allegedly fraudulent extraction of $20 billion from the Government to support the Merrill merger. The thrust of the allegations is that the Bank, Lewis, and Price falsely claimed to Treasury Secretary Paulson and Fed Chairman Bernanke that the Bank could back out of the merger by reason of the MAC clause, due to the unanticipated losses suffered by Merrill during the fourth quarter of 2008, and that it could only proceed with the merger with taxpayer assistance. The detailed allegations make for fascinating reading, and certainly do not cast a favorable light on Lewis, Price, or counsel, but the relevance of the allegations is not entirely clear, given that neither Paulson nor Bernanke was fooled — they saw the argument as a negotiating tactic and probably without foundation — and, as we now know, the Bank in December 2009 repaid not only the $20 billion the Government invested in the Bank to assist with the Merrill merger but also the other $25 billion in TARP monies invested by the Government in the Bank.
But here is some of the gory detail.
The thrust of Cuomo’s allegations, which do serve to emphasize the weakness of the Bank’s position in failing to disclose Merrill’s fourth quarter losses to its shareholders prior to the shareholder vote, is that the Bank tried to use the very same losses that it concluded were not necessary to disclose to its shareholders as grounds for claiming Merrill had suffered a “material adverse change” and therefore would be justified in backing out of the merger! As Cuomo alleges:
“Thus, only the remaining $1.4 billion represented losses incurred after the shareholder vote but prior to December 12 [when the Bank embarked on MAC discussions with the Government]. In other words, BoA management sought taxpayer aid to save the Bank on a figure that was in reality only $1.4 billion worse than the losses they concealed from shareholders voting on the Merrill acquisition. Their action demonstrates, perhaps more clearly than any other fact, the materiality of the pre-vote losses, and BoA management’s obligations to disclose them.”
Complaint ¶¶ 167 (emphasis in original).
Moreover, both the Bank’s general counsel, Mayopoulos (by now having been fired), and the Wachtell firm advised the Bank against invoking the MAC clause. In another illustration of why it is never a good idea to waive the attorney-client or attorney work product privileges, Cuomo details Wachtell’s advice on the MAC clause to the Bank:
“Wachtell concluded right away that invoking the MAC clause would likely fail, and worse, could put the Bank at huge risk of being forced to purchase a bankrupted Merrill Lynch. On December 14, Roth took notes of a conversation with Demmo [another Wachtell partner] in which he noted ‘If we call the MAC company = bankrupt damage = huge,’ which he testified meant that ‘given the state of the financial markets, just the assertion that Merrill had suffered a MAC would probably result in counterparties refusing to deal with Merrill, and, as we saw with Lehman, it may not survive a day.’ The notes also reflect that the initial thinking included government aid: ‘Go to gov’t to share pain? Get addl cap.’ Roth testified that this note reflected Demmo’s thinking ‘that one possible course of action to consider would be the prospect of going to the government and getting some form of assistance.’ Moynihan likewise testified that going into the meetings with the federal officials, a potential solution to the situation was obtaining government aid.”
Complaint ¶ 182.
Demonstrating the dexterity lawyers are capable of, Wachtell’s advice to its client did not prevent it from forcibly arguing to the Government that the Bank could successfully invoke the MAC clause with Merrill and back out of the deal:
“The very lawyers who concluded that a MAC claim would be futile and disastrous argued forcefully to federal officials that a MAC case would be successful. Brenner [the Bank’s Associate General Counsel] described the December 19 meeting [with Paulson and Bernanke] to Moynihan as follows:
Eric [Roth] made a very strong case as to why there is a MAC. All questions (other than one) came from Tom Baxter at the NY Fed and focused on the case law around MAC. Since Eric or Peter [Hein] [of Wachtell] were involved in each case Tom cited, no line of questioning evolved very well for Tom. Tom observed there had never been a successful MAC case before, and Eric responded that all cases are factually based, and this one essentially could be the first due to magnitude and duration of future lost earnings.
In other words, even though it knew a MAC claim was out of the question, the Bank threatened federal officials that it would make one anyway, in order to get taxpayer aid.”
Complaint ¶ 200.
C. Thain’s Reputation Restored?
John Thain should thank Judge Rakoff for his rejection of the August 2009 settlement between the SEC and BofA. As a result of the rejection, the Commission was forced to develop and disclose the record of the deal and the negotiations conducted between the parties in connection with the merger. That record establishes that Merrill (and Thain) did not conceal relevant information concerning the payment of 2008 fourth quarter bonuses to Merrill’s employees or the losses incurred by Merrill for the fourth quarter of 2008.
Lewis fired Thain on January 22, 2009. The firing, widely reported, came in a visit Lewis paid to Thain in New York, and was delivered in a meeting that lasted less than 15 minutes. Officially, all that the Bank stated, in its press release announcing Thain’s departure, was that he was “leaving the company.” Most of the release was devoted to Moynihan’s elevation to President of Global Banking and Global Wealth and Investment Management (replacing Thain). (Moynihan would eventually replace Lewis as CEO of the Bank in December 2009.)
The dirt came in the press reports, which obviously relied upon Bank representatives for their information. Thus, the New York Times, in its report on the termination of January 23, 2009, noted that despite Merrill’s mounting losses over the fourth quarter, it “rushed to pay annual bonuses to its employees before its deal with Bank of America closed on Jan. 1.” While noting that Merrill did alert the Bank in “mid-December” that its losses were ballooning, the Times reported that “Mr. Lewis did not hear the news from Mr. Thain, who around that time left for a skiing trip at his second home in Vail, Colo.” Ouch!
Another reason for the termination, reported the Times, “may have been the decision by Mr. Thain to make an earlier-than-usual bonus payout to Merrill employees, just three days before the merger closed, and before Bank of America could do anything to prevent it.” Thain, following corporate etiquette, “declined through a spokeswoman to comment on whether he had misrepresented Merrill’s risks at the time of the merger.”
But, as the SEC’s Statement of Facts (for which BofA formally acknowledged there was “an evidentiary basis”) and Cuomo’s Complaint make clear, the Bank was well aware of Merrill’s mounting losses during the fourth quarter of 2008 (on a daily basis), agreed with Merrill that it could pay up to $5.8 billion in bonuses for 2008, and was aware of and did not object to the payment of the bonuses actually awarded prior to year end. SEC Statement ¶¶ 33, 39-40, 47; Complaint ¶¶ 236-40.
This is not to say that Thain’s termination was not inevitable. The captain goes down with the sinking ship. With its massive fourth quarter 2008 losses and the outrage that greeted its payment of billions in bonuses, it is no surprise that Lewis “suggested” Thain leave the combined company. What is clear is that the request was not prompted by any failure of disclosure by Merrill or Thain to BofA.
D. What Will Judge Rakoff Do?
As indicated, on Monday, February 8, Judge Rakoff held a preliminary hearing on the second settlement, and, in his fashion, voiced some skepticism. The Judge has now issued his order, on February 11, requesting additional information and certain clarifications concerning this second settlement. This one is not over.
First, for the easy part: the Judge requests the parties to indicate whether they would agree to modifications of the prophylactic provisions of the settlement to permit Court intervention if the parties (the SEC and the Bank) do not agree on the appointment of (i) the independent auditor to conduct the disclosure controls and procedures certification, (ii) disclosure counsel to be retained by the audit committee, or (iii) the independent compensation consultant to be retained by the compensation committee of the BofA board of directors. In any such instance, Judge Rakoff is suggesting the prophylactic provisions be modified to permit the Court to make the choice if the parties are unable to do so. I would anticipate that neither the Commission nor the Bank will have any objection to these suggested revisions to the prophylactic provisions of the settlement.
The Judge also requests clarification that the distribution of the $150 million civil fine not be made to “legacy Merrill Lynch” shareholders of the Bank, meaning those formerly Merrill shareholders who received BofA stock in the merger. No surprise here.
Where things get very dicey is with the Judge’s request for all underlying evidence for his review on the following matters:
• The Mayopoulos termination;
• Wachtell Lipton’s participation, if any, in the “evaluation of the disclosure issues raised by the reports of increased losses at Merrill Lynch & Co.”;
• All recommendations that the Bank disclose Merrill’s fourth quarter 2008 losses, including any from Mayopoulos, Wachtell Lipton, Merrill’s auditors, BofA’s “corporate treasurer,” or anyone else; and
• Similar information as to disclosure of the agreement reached by the Bank and Merrill vis รก vis the payment of 2008 bonuses.
The Judge asks for the underlying evidence relating to the above-referenced matters, requesting that the parties “jointly and severally” arrange the evidence in accordance with the Judge’s listing of the topics he is interested in. He does not call for any argument on the question he is obviously interested in, namely, whether there is any culpability by any individuals for the alleged disclosure violations by the Bank.
The order requires the parties to make their submissions to the Court by no later than 5 p.m. on Tuesday, February 16, 2010. There goes the Presidents’ Day holiday for counsel to the Commission and the Bank. It is safe to say they must all be muttering under their breath about their blown weekend and what Judge Rakoff is up to.
We shall soon see.
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