The Securities & Exchange Commission sued Bank of America (BAC) on Aug. 3 for not having informed investors about bonuses the government said the nation's largest bank agreed to pay to Merrill Lynch executives as part of the bank's $50 billion acquisition of Merrill last January. While the SEC said that Bank of America had agreed to settle the charges and pay a fine of $33 million, the government's action gives new ammunition to dissident investors and some Obama Administration officials in their campaign to force out Bank of America's chief executive, Kenneth Lewis.
Separately, BofA announced a management shakeup that includes the hiring of former Citigroup (C) executive Sallie Krawcheck and the departure of consumer banking head Liam McGee.
In the suit, which was filed in U.S. District Court for the Southern District of New York, the SEC alleges that Bank of America promised in proxy materials prepared for a shareholder vote on the deal that Merrill Lynch had agreed it would not pay yearend performance bonuses or any other special pay without the bank's approval. But the SEC says that Bank of America had already authorized Merrill in writing to pay up to $5.8 billion in bonuses to Merrill executives for 2008. The SEC said the omission was "materially false and misleading" since the undisclosed payout represented roughly 12% of the effective sale price.
In settling, Bank of America neither admitted or denied the SEC charges.
BofA board departures rise to 10 this yearWhen some lawmakers and prosecutors became outraged after learning that Merrill Lynch executives were taking such large payouts at a time when the combined company was receiving billions of dollars in federal bailout funds, Lewis claimed that he didn't have the authority to stop the bonus payouts since the merger hadn't closed and Merrill was still an independent company with its own board. But the SEC alleges that while the merger contract prohibited such bonuses, BofA and Merrill had signed a side deal that approved the bonuses and required 60% of the payouts to come in cash and 40% in stock.
The lawsuit and settlement come at a time when Bank of America has been under heavy pressure from regulators and some Administration officials to overhaul its leadership. Regulators imposed sanctions earlier this year that required BofA to tighten up its risk management and lending practices, bring in more veteran bankers onto its board, and give the government a clear succession plan—a move that suggested Treasury and Federal Reserve officials were losing patience with Lewis. On July 31 the bank disclosed that three more directors were stepping down, bringing the number of board departures to 10 so far this year.
Shortly after the SEC settlement was disclosed, Bank of America announced that Krawcheck, a veteran of both Sanford Bernstein and Citigroup, will join as head of BofA’s global wealth and investment management group. Krawcheck replaced Brian Moynihan, who will now lead consumer banking for BofA. In other moves, former Merrill Lynch executive Tom Montag was named to head corporate and investment banking. "These changes also position a number of senior executives to compete to succeed me at the appropriate time," Lewis said in announcing the changes. The odd man out: Liam McGee, who had been considered among the candidates to one day succeed Lewis.