Monday, January 11, 2010
The SEC announced today that it seeks to charge Bank of America with failing to disclose extraordinary financial losses at Merrill Lynch prior to a shareholder vote to approve a merger between the two companies. By 8 p.m., the Wall St. Journal and New York Times reported that Judge Rakoff denied the SEC's attempt to add new charges, but said that the agency could file a new complaint.
The SEC also said it would not file charges against BofA executives because it has found no evidence that they deliberately concealed the information. You will recall the Judge Rakoff, in refusing to approve the proposed settlement between the SEC and BofA, was sharply critical of the imposition of a fine on the corporation in conjunction with the failure to seek relief from individuals who made the relevant disclosure decisions.
It is not clear to me why the SEC has apparently charged the corporation with negligent violation of Rule 14a-9, but asserts that scienter is required to hold the individuals liable. It remains an open question (until the Supreme Court decides it) whether scienter is required to establish a section 14(a) violation, but I am not aware of any precedent that holds there is a different culpability standard for corporate and individual defendants.
In its original complaint, the agency charged the bank with misleading investors about billions of dollars in bonuses that were being paid to Merrill executives. That complaint was amended in October to add a charge for Bank of America's failure to comply with certain affirmative disclosure obligations under the federal proxy rules. The proposed second amended complaint alleges that Bank of America learned prior to the Dec. 5, 2008, shareholder meeting vote that Merrill Lynch experienced a net loss of $4.5 billion in October and estimated that it had experienced billions of dollars of additional losses in November. The actual and estimated losses together represented approximately one-third of the value of the merger at the time of the shareholder meeting and more than 60 percent of the aggregate losses Merrill Lynch sustained in the preceding three quarters combined. It alleges that Merrill's slumping performance represented a fundamental change to the financial information that Bank of America provided shareholders in a Nov. 3, 2008 proxy statement to solicit their votes for approval of the Merrill Lynch merger on terms that had principally been negotiated in September 2008. In connection with the merger, Bank of America also publicly filed a registration statement in which it represented that it would update shareholders about any fundamental changes in the information previously disclosed.
The SEC's proposed complaint would allege that Bank of America erroneously and negligently concluded that no disclosure concerning these extraordinary losses was required as shareholders were called upon to vote on the proposed merger with Merrill Lynch. The Commission also would allege that the lack of any disclosure about the losses deprived shareholders of up-to-date information that was essential to their ability fairly to evaluate whether to approve the merger on the terms presented to them. According to the proposed complaint, Bank of America's failure to disclose this information violated its undertaking to update shareholders concerning fundamental changes to previously disclosed information, and rendered its prior disclosures materially false and misleading.
In the course of discovery in the pending case against Bank of America and earlier investigation, the Commission's staff reviewed tens of thousands of pages of records, including e-mail and other electronic communications relating to the merger. SEC staff took testimony or conducted investigative interviews of dozens of witnesses, including senior executives, internal counsel, and external counsel of both Bank of America and Merrill Lynch. Pursuant to a stipulation and order entered by the court in October 2009, Bank of America waived all claims of privilege relating to the proxy disclosures made in connection with the merger and several other subjects in order to permit the SEC to conduct a thorough investigation of these subjects, including the actions, advice and communications of counsel.
According to the SEC's proposed complaint, Bank of America executives at various times discussed the firm's disclosure obligations with internal and external counsel. These executives are not alleged to have deliberately concealed information from counsel or otherwise acted with scienter or intent to mislead. Nor is any counsel alleged to have acted with scienter or intent to mislead. For these reasons, the SEC's proposed complaint does not seek charges against any individual officers, directors or attorneys. SEC staff has advised the Commission that, after a careful assessment of the evidence and all of the relevant circumstances, it has determined that charges against individuals for their roles in connection with proxy disclosure are not appropriate.