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Disclosures and Evoking the Lewis Liman Defense

By Knut A. Rostad

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News reports this week of U.S. District Judge Jed Rakoff’s questioning the Bank of America–SEC settlement might have been confused. That is, confused with news reports of town hall meetings of voters questioning members of Congress about health care “reform.” In both cases, it appears, frustration and anger were palpable.

Judge Rakoff, according to reports, called Monday’s hearing to find out why the SEC accepted the $33 million settlement in light of its allegations that B of A failed to disclose that bonus payments were authorized for up to $5.8 billion. Rakoff called the fine “strangely askew.”

According to the SEC complaint, “in proxy materials soliciting the votes of shareholders on the proposed acquisition of Merrill, Bank of America stated that Merrill had agreed that it would not pay year-end performance bonuses or other discretionary compensation to its executives prior to the closing of the merger without Bank of America’s consent.” The SEC called these disclosures “materially false and misleading.” Judge Rakoff, according to The New York Times article, “Judge Attacks Merrill Pre-Merger Bonuses,” did not mince words, and said the firms “Effectively lied to their shareholders.” http://www.nytimes.com/2009/08/11/business/11bank.html

Bank of America didn’t see it that way. In defense, a firm spokesman argued that no one did anything intentionally wrong, and the settlement was “constructive.” Bank of America attorney, Lewis Liman, apparently sought to retake the high ground in responding to Judge Rakoff.. He tried to argue that the bonuses were reasonable. As to the 39,000 Merrill employees whose bonus averaged $91,000, Liman called this amount “not a lot of money.” (The total $3.6 billion in bonus payments were just 13% of Merrill’s $27 billion loss for the year.) To cap off his case, Liman then seemed to blame shareholders for not having known better. For not being wise in Wall Street ways so as to know Merrill employees would get bonuses. The Times quotes him, “My, God! Bonuses on Wall Street? It is not a matter of surprise.”

The SEC complaint against Bank of America is, understandably, reported as a story about unwarranted executive compensation. It is, in part. It is also a story of a flagrant fiduciary breech, a denial of shareholder harm, and a (dismissive) assertion the breech doesn’t matter anyway. Why? Shareholders should have known what the SEC alleges should have been disclosed.

Today we have established the Lewis Liman non-disclosure defense: the shareholders (read, “clients”) already know the material fact in question. An immediate question might be, as Judge Rakoff continues his inquiry, is simple enough. Will B of A continue to have Lewis Liman represent the corporation’s values and policies to the global audience of investors, shareholders and regulators that is taking notes? Stay tuned.

Knut A. Rostad ([email protected]) is the regulatory and compliance officer at Rembert Pendleton Jackson (RPJ), a registered investment advisor in Falls Church, Virginia, and Chairman of The Committee for the Fiduciary Standard. The views expressed here are his own and do not necessarily reflect views of the Committee.