BizAims

Bank of America Corp.’s proposed $150 million settlement with the U.S. Securities and Exchange Commission over the purchase of Merrill Lynch & Co. will be accepted or rejected next week, a federal judge said.

U.S. District Judge Jed Rakoff in New York, who rejected a $33 million settlement in September, told lawyers for both sides today that he still has concerns about the proposal and plans to submit additional questions to them on Feb. 11. After reviewing their responses, he will decide whether to accept the settlement by Feb. 19, he said. Should he reject the settlement, the civil case will go to trial, which is now set for March 1.

Rakoff said he viewed proposed changes to the internal governance structure of the Charlotte, North Carolina-based bank as “quite positive.”

The judge said he remains concerned whether the bank’s withholding of information from investors was intentional or negligent related to the Merrill acquisition. He said he still has questions about whether he should be empowered to help select the bank’s compensation consultant and whether the $150 million payment by the bank is appropriate. Under the deal, the $150 million would go only to shareholders who were harmed.

“The broad question is, why should shareholders be paying shareholders?” Rakoff said. “There’s a circularity, at least in part, to this proposal.”

Bonuses

In its lawsuit filed Aug. 3, the SEC claims the bank, the largest U.S. lender, misled shareholders about bonuses and losses at Merrill Lynch.

Rakoff rejected the first settlement after asking why officers or directors weren’t sued by regulators. He questioned why shareholders, who were allegedly misled, should bear the costs.

The new settlement also doesn’t name bank officers or directors. The SEC and the bank say their deal requires the bank to take steps over the next three years to strengthen corporate governance.

The new accord was announced Feb. 4, the same day New York Attorney General Andrew Cuomo sued former Bank of America Chief Executive Officer Kenneth R. Lewis and ex-Chief Financial Officer Joseph Price for fraud. They’ve denied wrongdoing.

Intentional, Negligent?

Rakoff said today that a key concern is whether the facts support Cuomo’s contention that the non-disclosure was intentional or the SEC’s view, which suggests it was just negligent. He also had questions about the role of the bank’s outside counsel, Wachtell, Lipton, Rosen & Katz, and the firing of its then-general counsel, Timothy Mayopoulos, in December 2008. Cuomo’s suit suggests he was fired because he wanted to disclose wider-than-expected losses, Rakoff said.

“I’m really presented here with two strikingly different versions of the facts,” Rakoff said.

George Canellos, the SEC’s New York regional director, told Rakoff that the agency doesn’t agree with all of Cuomo’s conclusions.

Rakoff asked whether he should have a role in the selection of a proposed compensation consultant. He noted that some consultants are known for recommending “incredibly bloated” pay packages. Lawyers for the bank objected to Rakoff having a role in picking a consultant, saying the bank’s compensation committee would protect shareholders.

“Our view is it would involve an inappropriate intrusion” into bank management, said Lewis Liman, a lawyer for the bank.

Proxy Statement

The SEC alleges in its lawsuit that Bank of America misled investors about Merrill’s bonus payments. The bank said in a November 2008 proxy statement that Merrill Lynch agreed not to pay year-end bonuses when the bank had already agreed to Merrill’s plan to pay as much as $5.8 billion, the SEC says.

The SEC expanded its claims last month in a separate lawsuit, saying the bank also failed to disclose Merrill Lynch’s expected losses.

Lawyers for Bank of America and the SEC said they would respond to Rakoff’s questions by Feb. 16.

The case is Securities and Exchange Commission v. Bank of America Corp., 09-cv-06829, U.S. District Court, Southern District of New York (Manhattan).