SEC shifts focus, but new complaint again fails Rakoff test

January 13, 2010

After Judge Jed Rakoff threw out its original $33 million settlement with Bank of America, the SEC shifted the focus of its case. In its new complaint filed today, the SEC still accuses BofA of misleading shareholders for failing to disclose material information. But the issue this time isn’t bonuses, it’s Merrill’s fourth quarter losses.

Yet the complaint still names no names and again asks BofA shareholders to pay for themselves being misled. In other words, Judge Rakoff’s beef with the original complaint would seem to apply to this one as well.

Here’s the allegation:

Bank of America’s failure to make any disclosure concerning Merrill’s October and November losses violated Bank of America’s express undertaking to apprise investors of fundamental changes and rendered its prior disclosures materially false and misleading in violation of the federal securities laws.

Pages 7 to 11 of the complaint recount how Merrill’s loss projections for Q4 kept ballooning while lawyers generated different excuses not to disclose them.

BofA’s last financial communication with the public was Q3 results, which showed a $5.2 billion loss. At that time analysts thought the worst was over, that Merrill would break even in Q4.

But by November Merrill admitted to BofA that they’d lost $4.6 billion in October. On December 3rd — two days before shareholders voted to approve the merger — Merrill gave BofA execs an updated Q4 projection: over $7 billion of losses. Days after the shareholder meeting the loss forecast jumped again to $12 billion.  When Merrill finally reported, its net loss came in at $15.3 billion.

It’s hard to see what tortured legal arguments BofA’s lawyers can muster to justify this disclosure failure…

But like the first complaint, this one names no names. It only refers to “a senior Bank of America executive” who told “senior executives at Merrill” that disclosure may be required. It also mentions that various BofA “lawyers” deliberated on the matter.

Assuming this results in another quick settlement where no one admits wrongdoing, one wonders if it will pass muster with Rakoff.

In last August’s hearing, he complained that SEC had failed to address the “who/what/where” of its case. “Was it some sort of ghost?  Who made the decision not to disclose [the bonuses]?” he asked. Replace “bonuses” with “losses” and you’ve still got the same issue.

Justice isn’t served if shareholders, who were misled, end up paying a fine to the government. And what of deterrence? If executives are never held responsible for their behavior, they’ll never change it.

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