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Meanwhile, N.Y.'s attorney general is preparing charges against company executives.
Published Sep. 15, 2009

NEW YORK - Giving voice to the anger and frustration of many ordinary Americans, federal Judge Jed Rakoff on Monday overturned a settlement between the Bank of America and the Securities and Exchange Commission over bonuses paid to Merrill Lynch executives just before the bank took over Merrill last year.

In his scathing ruling, Rakoff voided a $33 million settlement that the bank had reached with the SEC over whether the bank had adequately disclosed the bonuses paid by Merrill. The takeover came at regulators' behest as Merrill began to founder.

The proposed settlement "does not comport with the most elementary notions of justice and morality," Rakoff wrote.

The judge accused the SEC of failing in its role as Wall Street's top cop by going too easy on one of the biggest banks it regulates. And he accused executives of the bank of failing to take responsibility for actions that blindsided its shareholders and the taxpayers who bailed out the bank at the height of the financial crisis.

Separately, New York Attorney General Andrew Cuomo's office is preparing to file charges within the next couple of weeks against several high-ranking executives at Bank of America, claiming they failed to disclose details about the bank's acquisition of Merrill Lynch, a person familiar with the investigation told the Associated Press.

The judge called the $33 million settlement unfair and inadequate, and he ordered Bank of America and the SEC to prepare for a possible trial that would begin by Feb. 1.

In forcing the two sides to argue their case in court, Rakoff hopes to expose the truth about whether Bank of America lied to shareholders about billions of dollars paid to Merrill's executives before the deal closed.

Rakoff focused much of his criticism on the fact that the fine in the case would be paid by the bank's shareholders.

"It is quite something else for the very management that is accused of having lied to its shareholders to determine how much of those victims' money should be used to make the case against the management go away," Rakoff wrote.

Bank of America agreed to acquire Merrill Lynch in a hurried deal a year ago at the height of the financial crisis, just as Lehman Brothers was preparing to file for bankruptcy. It was later revealed that Merrill, with the knowledge of Bank of America executives, paid Merrill employees $3.6 billion in bonuses just before the deal closed on Jan. 1.

Merrill wound up paying the bonuses for 2008 despite losing $27.6 billion that year. Those losses affected the bottom line at Bank of America, one of the largest recipients of U.S. government bailout funds.

Both the bank and the SEC said they disagreed with the judge's decision and were evaluating their legal options. .

The ruling seemed to speak to the anger across the nation over the excesses that led to the financial crisis, and the lax regulation in Washington that permitted those excesses to flourish.

Rakoff had demanded that the SEC and bank explain which executives were responsible for failing to tell the bank's shareholders about the bonuses. That information, with evidence of Merrill's losses that also were not disclosed, may have led shareholders to reject the merger.

The judge accused Bank of America and the SEC of concocting the settlement to effectively absolve both sides of further responsibility.

"The SEC gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger," the judge wrote, and "the Bank's management gets to claim that they have been coerced into an onerous settlement by overzealous regulators."

The ruling echoes criticism that the SEC has failed to prosecute cases against corporate executives, opting for quick settlements in which companies themselves are penalized instead of their leaders.