Bank of America has agreed to pay $33 million to settle charges by the Securities and Exchange Commission that the bank misled investors about $5 billion in bonuses that were being paid to Merrill Lynch & Co. executives when it acquired the firm.
In settling the SEC's charges without admitting or denying the allegations, Bank of America consented to the entry of a judgment that permanently enjoins the bank from violating the proxy solicitation rules and orders it to pay the penalty. The settlement is subject to court approval.
In it's complaint, the SEC alleged that in proxy materials soliciting the votes of shareholders on the proposed acquisition of Merrill, Bank of America stated that Merrill had agreed that it would not pay year-end performance bonuses or other discretionary compensation to its executives before the closing of the merger without Bank of America's consent. But the SEC says Bank of America had already contractually authorized Merrill to pay up to $5.8 billion in discretionary bonuses to Merrill executives for 2008. According to the SEC's complaint, the disclosures in the proxy statement were rendered materially false and misleading by the existence of the prior undisclosed agreement allowing Merrill to pay billions of dollars in bonuses for 2008.
"Companies must give shareholders all material information about corporate transactions they are asked to approve," said Robert Khuzami, director of the SEC's Division of Enforcement. "Failing to disclose that a struggling company will pay out billions of dollars in performance bonuses obviously violates that duty and warrants the significant financial penalty imposed by today's settlement."
David Rosenfeld, associate director of the SEC's New York Regional Office, added, "As Merrill was on the brink of bankruptcy and posting record losses, Bank of America agreed to allow Merrill to pay its executives billions of dollars in bonuses. Shareholders were not told about this agreement at the time they voted on the merger."
The SEC's complaint, filed in the U.S. District Court for the Southern District of New York, alleges that Bank of America represented in the merger agreement that Merrill had agreed not to pay any bonuses to its executives before the merger closed, except as set forth in a schedule. Unbeknown to shareholders, the schedule was already in place weeks before the proxy statement was filed with the SEC and disseminated to shareholders. Under the schedule, Bank of America had agreed that Merrill could pay up to $5.8 billion, or nearly 12% of the $50 billion merger cost, in discretionary bonuses to its executives. The merger agreement was included as an appendix and summarized in the joint proxy statement that was distributed to all 283,000 shareholders of both companies. But Bank of America's agreement to allow Merrill to pay these discretionary bonuses was in a separate document that was omitted from the proxy statement and whose contents were never disclosed before the shareholders' vote on the merger.