At last, there is at least a partial an answer to the now famous question posed by then Judge Stanley Sporkin, a former SEC Enforcement Director, about the savings and loan debacle: to paraphrase “where were all the lawyers and accountants?” Lincoln Savings & Loan Ass’n. v. Wall, 743 F. Supp. 901 (D.D.C. 1990). The lawyers were advising on the acquisition of Merrill Lynch by Bank of America. According to the SEC, it was the advice of the lawyers that resulted in the shareholders of both companies not being told about the billions of dollars in bonuses approved for Merrill employees when they voted on the acquisition of the broker by the bank. The reasons for this decision and who else may have participated in it, are, however, still unknown.

Bank of America and the SEC filed briefs yesterday urging that the court approve the settlement of the Commission’s enforcement action against the bank for proxy violations. The SEC’s enforcement action, as discussed here, alleged that the proxies provided to shareholders of the bank and the brokerage firm were false and misleading because they stated that Merrill Lynch “shall not, without the prior written consent of [Bank of America] . . . increase in any manner the compensation or benefits of any of the current or former directors, officers or employees of . . .” the broker, when in fact up to $5.8 billion in bonuses had been approved.

The crux of the SEC’s complaint is that, while the representations in the proxy were qualified and accurately summarized the attached merger agreement, a schedule to that agreement listing the bonuses was omitted from the materials given to shareholders, meaning they did not get the full story. To settle, the bank consented to an injunction and the payment of a $33 million fine. The court however, declined to execute the consent decree and ordered briefs explaining what happened.

The SEC and Bank of America appear to discuss different cases in their papers. The Commission repeatedly states that the proxy materials furnished to the shareholders omitted the information about the bonuses and were thus incomplete and incorrect. The SEC also notes that while there were various references in other Merrill filings about bonuses and rumors in the press, “[t]he amount Merrill actually planned to pay in year-end bonuses could not be discerned from the aggregate ‘compensation and benefits’ accrual that Merrill disclosed in its quarterly filings.” The available numbers, according to the testimony of Merrill’s most senior human resources executive, were inadequate to determine the annual bonuses.

Nevertheless, the Commission urges that the settlement be approved. The SEC argues that it is not in a position to charge individuals because all of the testimony taken during its investigation indicates that the decision not to tell the shareholders was made by the lawyers. The bank however, has not waived privilege. In addition, the fine imposed is consistent with those in other similar cases. There is no explanation for the lack of remedial procedures aside from the injunction.

Bank of America seems to be discussing a different case from the Commission. The bank argues that “[c]ontrary to the gravaman of the SEC’s complaint . . . in no way can the plain language of the Proxy Statement be read as a representation that Merrill Lynch would not pay any discretionary incentive compensation to its employees. To the contrary, the Proxy statement and Merger Agreement made clear that their covenants were subject to certain exceptions, including those set forth in a separate Disclosure Schedule.” The proxy statement also warned that the information in it was limited. Material about the bonuses was also widely available in other filings and reported in the press. From all of this material, shareholders were clearly aware of the bonuses, the bank argues. In any event, the SEC has only focused on one sentence which, in the total mix of information, is not material. There is no reference to the decision of the lawyers discussed by the SEC.

Despite the fact that it did nothing wrong, the bank made a business decision to settle the case. It did not want to be involved in litigation with one of its primary regulators. The bank’s position is supported by an expert declaration arguing that the format and presentation of the proxy and merger materials is consistent with that of other similar transactions and by a former SEC Commissioner urging that the settlement be approved using many of the arguments offered by the bank.

When all the papers filed are reduced to their essence the key point remains: the shareholders who voted on the deal were not specifically told by their respective companies in the materials used to solicit their votes that the directors of Bank of America and Merrill Lynch had approved bonuses of up to $5.8 billion dollars. The reasons for this decision by the lawyers or otherwise remain unknown.

What is known is that the SEC and the bank want this case settled. What is also known is that the decision not to give the shareholders the schedule listing the bonuses was made at a time when the President, Congress and the public were expressing extreme dissatisfaction over the payment of Wall Street bonuses.

The end result of this case — if the settlement is approved by the court — is also known: the shareholders lose. The shareholders pay for bonuses they did not specifically approve. The shareholders pay the fine because they were not told about the bonuses. For the shareholders, there is no assurance this will not happen to them again — there are no remedial procedures except a standard injunction and the bank insists it was right.