The settlement over Merrill Lynch bonus payments that has been negotiated between the SEC and Bank of America (BAC) is a sham. The compensation that was paid was legal, after all. Why should the bank give the agency a cent? The proposed $33 million settlement to get the matter behind B of A is unnecessary.

A federal district judge recently refused to grant approve the settlement between the SEC and B of A. He said that the reasons for the agreement were not transparent. He felt that he could not approve a settlement that he could not understand because he had not been given the details necessary to make a reasoned decision. He could not tell if the bank’s actions were innocent or heinous — an odd spot for a sitting federal judge to be in—deciding an issue which he barely understands.

The bank turned the tables on everyone by saying that there was nothing wrong whatsoever with paying the bonuses. Any fool who reads the newspapers, including the judge it must be assumed, knew that B of A was going to have to pay out big compensation to some of Merrill’s senior employees.

Reuters reports “In a Monday filing with Manhattan federal court, the largest U.S. bank said it was “widely understood” from Merrill’s public disclosures and media reports that Merrill would award billions of dollars of year-end bonuses, despite a full-year loss that would reach $27.6 billion.” Put another way, B of A is saying that it is fine to do something wrong if everyone knows about it.

The legal issue about the bonuses is that the proxy Bank of America sent out to get approval of the Merrill deal was not accurate in its portrayal of the timing and process for granting the compensation to Merrill’s employees. The bank now says, “There was no false or misleading statement or omission” in the proxy. Both arguments could be true simultaneously, but it is hard to see how.

The SEC and Bank of America made a mistake when they decided that they could sweep something serious under the rug. A public company that makes false statements in a proxy, particularly one that asks for the approval of a very large and risky deal, should not get off with a $33 million fine and agreement that it will try harder the next time.

Or, it may be that the SEC wanted a quick victory for the press. The agency has been under withering criticism for not being a better policeman on Wall St. The financial firm is in no position to weather a long fight with the agency. Bank of America’s problems with losses and the fall-out from the Merrill transaction go far beyond the details of a proxy. The SEC’s case may not have been bullet-proof but it may have been enough of a nuisance that the bank wanted to see it go away. Thirty-three million dollars is not much to pay for a “get out of jail free” card.

Big money and big government agencies broker secret deals all the time. This time they got caught. A federal judge just asked a simple question. What is the cause of a $33 million settlement and why is it fair? Oddly enough, none of the parties involved has an answer.

Douglas A. McIntyre

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