NEW YORK AND LOS ANGELES — In a rare move, a federal judge threw out a deal in which Bank of America Corp. would have paid $33 million to settle charges that it misled shareholders about $3.6 billion in bonuses being paid to Merrill Lynch & Co. executives, contending that the punishment was too light.
U.S. District Judge Jed Rakoff in New York also lashed out at federal regulators, saying they didn't dig deeply enough to determine whether Bank of America executives intentionally set out to deceive shareholders about plans to pay bonuses to employees of Merrill Lynch last year, when the bank was acquiring the Wall Street firm.
Rakoff's ruling Monday was another embarrassment for the Securities and Exchange Commission, which has come under fire for failing to heed repeated warnings about Bernard Madoff's Ponzi scheme, and could put more pressure on the agency to toughen its stance on corporate misconduct.
By casting a harsh spotlight on the SEC's willingness to settle cases without proving allegations in court or forcing companies to admit wrongdoing, the ruling could embolden other judges to view such settlements critically, legal experts said.
"The SEC can no longer count that other federal judges will be rubber stamps," said John Coffee, a Columbia University law professor. "The judges are going to take a closer look."
The judge issued his decision as President Obama marked the one-year anniversary of the collapse of Lehman Bros. by speaking in New York to push for his financial regulatory overhaul, including measures to rein in executive pay.
"We will not go back to the days of reckless behavior and unchecked excess that was at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses," Obama said in remarks at historic Federal Hall across from the New York Stock Exchange.
The government alleged that Bank of America deceived shareholders into believing that Merrill Lynch, staggering from financial losses, would not pay year-end 2008 bonuses. In fact, the SEC says, the bank had already approved $5.8 billion in Merrill bonuses, of which the brokerage eventually handed out $3.6 billion.
In his 12-page ruling, Rakoff criticized the $33-million payment, saying that if Bank of America intentionally deceived shareholders, "$33 million is a trivial penalty for a false statement that materially infected a multibillion-dollar merger."
