The court rejected the proposed settlement in SEC v. Bank of America in part because the truth about what happened had not emerged. The SEC essentially said it could not find the truth, claiming the bank asserted privilege. The bank claimed it told the truth to its shareholders in the proxy materials used to secure approval of the Merrill Lynch acquisition, but it was not telling who made the decision or how it was made to omit the schedule the SEC claimed should have been included which listed the bonuses.

Now it appears that the truth is about to emerge, or at least some of it. Bank of America has reached an agreement regarding the production of privileged material with the New York Attorney General’s office in its investigation which parallels that of the SEC. Under the agreement, the bank will waive privilege and produce documents on five topics: 1) disclosures to be made in or omitted from the proxy statement; 2) the bank’s consideration of whether to invoke the material adverse change clause in the acquisition agreement; 3) the disclosure or non-disclosure of any matter relating to any potential impairment of goodwill of Merrill Lynch in the fourth quarter of fiscal year 2008; 4) the public disclosure or non-disclosure prior to the merger of the financial performance, forecasts, and/or preliminary and interim results of Merrill Lynch for the fourth quarter; and 5) the bank’s communications with federal regulators regarding the terms of federal assistance in connection with the merger.

While this agreement is with the New York AG, it will inure to the benefit of the SEC. The letter specifically states that “[b]ecause Bank of America has decided to reconsider its position with respect to your investigation, it will also produce privileged information to federal regulators . . .” If indeed the truth now emerges, perhaps it will set the stage for a settlement of SEC v. Bank of America.

Even if the case settles, a key question will remain: Why was the New York AG is able to secure an agreement to obtain the critical information when the SEC could not? The SEC has all the tools to obtain evidence necessary to its investigations. The Commission cannot of course obtain privileged material. In rejecting the settlement in the SEC’s case however, the court virtually dismissed out of hand the Commission’s suggestions that privilege blocked its investigation. Now Mr. Cuomo has obtained by agreement what the SEC claims it could not obtain.

What is befuddling about the SEC’s position is not that it failed where Mr. Cuomo succeeded. Clearly the New York AG had the benefit of the opinions in the SEC’s case. The troubling aspect of the SEC’s investigation is that the agency appears not to have even tried to obtain the material. Its papers do not suggest that it confronted the bank on the question of producing materials about the decision to omit the critical schedule from the proxy materials. No subpoena enforcement action was filed. In sum, it appears that the agency simply rolled over when the bank said it could not have the documents or the testimony.

Now it appears that the New York AG can do what the SEC will not even attempt. This is yet another black eye for the SEC and its enforcement program. How many more will it take before enforcement is rejuvenated or the agency is dismantled?