The BofA SEC Flap: Small Potatoes

OK, here’s the gist of the SEC complaint against Bank of America (BAC). It comes from the New York Times Deal Book.

The lawsuit involves statements Bank of America made in its proxy statement to investors about the Merrill deal. The bank told its investors that Merrill had agreed not to pay year-end performance bonuses or other incentive pay before closing the deal without Bank of America’s consent.

But after it issued the proxy report, Bank of America agreed that Merrill could pay up to $5.8 billion in year-end compensation to employees, the S.E.C. said in its complaint, which was filed in New York federal court. That agreement was memorialized in a separate bonus schedule that was omitted from the proxy statement, the S.E.C. said.

Bank of America agreed to settle the S.E.C’s charges without admitting or denying the allegations and pay a penalty of $33 million.

Here is a link to the actual SEC complaint.

It seems like much ado about very little. I don’t see the potential for much fallout here and it looks like they’ve settled already so it isn’t going to have much in the way of legs as a news story.

I’m sure we will hear the usual calls for Ken Lewis’s ouster and it might well come to that. As much as the bank’s been dragged through the mud, someone — someone big like Lewis — probably needs to get his head chopped off for PR purposes. You know, the sacrificial lamb gig.

Comments

[truthteller:]

I am no fan of Ken Lewis, however I feel the man has gotten a terrible wrap. I suspect history will show the man was greedy, gullible and very wreckless with the trust so many placed in him. Also, history will probably show he fell victim to a government scam and a misplaced sense of patriotism. We won't know the entire story until Ken Lewis leaves Bank of America and frankly we may never receive a full accounting because lawyers are very good at crafting confidential agreements. However, I would like to engage in pure speculation. What if the Treasury began shopping Merrill, knowing full well the company was iinsolvent? How could you get someone to take on this enormous amount of risk willingly?

First, I guess you would have to pick a relatively strong financial institution, with some political baggage like the acquisition of Countrywide mortgage. Otherwise, a strong company could put up a heck of a fight and blow the whole deal. Second, you need to convince the CEO that a bidding war was going to erupt over Merrill, but they could pre-empt this by acting quickly. Third, you need to put them in a position to commit without a good look at the company's books. The only way you can accomplish this is by appealing to the person's greed, stroking their ego, sense of patriotism and making verbal assurances not bound by a written contract. The final ingredient needed is: Once they find out the deal was bad, losses are mounting and any reasonable CEO would invoke a MACC (Material Adverse Condition Clause); then threaten to remove the CEO and Board of Directors. Lewis thought he could make a bundle of money and be a good patriot at the same time. However, he soon found out, just how quickly the rulles change, when you make deals with politicians and climb into bed with Uncle Sam.

Aug 03 11:57 PM

[Tom Lindmark:]

I agree with a lot of your points, particularly the one about rules changing when you contract with the government.


On Aug 03 11:57 PM truthteller wrote:

> I am no fan of Ken Lewis, however I feel the man has gotten a terrible
> wrap. I suspect history will show the man was greedy, gullible and
> very wreckless with the trust so many placed in him. Also, history
> will probably show he fell victim to a government scam and a misplaced
> sense of patriotism. We won't know the entire story until Ken Lewis
> leaves Bank of America and frankly we may never receive a full accounting
> because lawyers are very good at crafting confidential agreements.
> However, I would like to engage in pure speculation. What if the
> Treasury began shopping Merrill, knowing full well the company was
> iinsolvent? How could you get someone to take on this enormous amount
> of risk willingly?
>
> First, I guess you would have to pick a relatively strong financial
> institution, with some political baggage like the acquisition of
> Countrywide mortgage. Otherwise, a strong company could put up a
> heck of a fight and blow the whole deal. Second, you need to convince
> the CEO that a bidding war was going to erupt over Merrill, but they
> could pre-empt this by acting quickly. Third, you need to put them
> in a position to commit without a good look at the company's books.
> The only way you can accomplish this is by appealing to the person's
> greed, stroking their ego, sense of patriotism and making verbal
> assurances not bound by a written contract. The final ingredient
> needed is: Once they find out the deal was bad, losses are mounting
> and any reasonable CEO would invoke a MACC (Material Adverse Condition
> Clause); then threaten to remove the CEO and Board of Directors.
> Lewis thought he could make a bundle of money and be a good patriot
> at the same time. However, he soon found out, just how quickly the
> rulles change, when you make deals with politicians and climb into
> bed with Uncle Sam.

Aug 04 12:37 AM