Court rejects SEC settlement with BofA

A US federal judge on Monday issued a sharp rebuke to the Securities and Exchange Commission by throwing out a $33m settlement between the regulator and Bank of America, calling the agreement "cynical" and setting the stage for a trial next year.

Jed Rakoff, a US district judge, said the agreement - to settle allegations that BofA made misleading statements to shareholders - was a "contrivance designed to provide the SEC with the facade of enforcement".

He reiterated his concern that the original settlement failed to identify individuals responsible for the alleged misstatements. In the proposed settlement, the SEC claimed BofA - in the November prospectus describing the acquisition of Merrill Lynch - misled shareholders when it said that no large bonuses would be paid to Merrill executives prior to the closing of the merger without BofA's consent.

But there was a side agreement to the original merger document, struck in mid-September 2008, allowing Merrill to pay up to $5.8bn in bonuses.

The SEC alleged that the side agreement, not included in the prospectus, amounted to a misleading statement on the part of BofA.

The bank agreed to settle the action for $33m last month, without admitting any liability - a standard component of SEC settlements.

Under Mr Rakoff's ruling, the SEC will have to prove its allegations at a trial.

BofA said it disagreed with the ruling. "BofA believes the facts demonstrate that proper disclosure was made to shareholders about the Merrill bonuses," it said. The SEC said: "We believe the proposed settlement properly balanced all of the relevant considerations. We will carefully review the court's most recent order."

The judge said BofA's reliance on $45bn in taxpayer funds gave the matter additional importance. He gave both parties until last week to persuade him that the $33m settlement should be accepted.

In Monday's order, Mr Rakoff wrote that the settlement "does not comport with the most elementary notions of justice and morality, in that it proposes that the shareholders who were the victims of the bank's alleged misconduct now pay the penalty for that misconduct".

In addition to the SEC investigation, BofA has also been fighting a parallel investigation into disclosures about the Merrill transaction headed by Andrew Cuomo, New York attorney-general.

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