Published: Monday, 10 Aug 2009 | 8:53 PM ET

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A federal judge refused to approve a proposed settlement between the U.S. Securities and Exchange Commission and Bank of America over the payment of bonuses to Merrill Lynch employees, saying he was unable to determine if it was fair to the public.

Oliver Quallia

The largest U.S. bank had agreed Aug. 3 to pay $33 million to resolve an SEC civil lawsuit accusing it of misleading shareholders by not disclosing it had authorized the payment of up to $5.8 billion of bonuses to Merrill employees.

About $3.6 billion was awarded.

But at a hearing Monday, Judge Jed Rakoff of the federal court in Manhattan said he needed a "much more detailed account of the underlying facts" before signing off. He suggested the settlement might not be "remotely reasonable" if the SEC were right that the bank lied about the bonuses.

"I would be less than candid if I didn't express my continued misgivings about this settlement at this stage," Rakoff said. He said the settlement "seems to be lacking in transparency."

Bank of America

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[BAC  Loading...      ()   ] spokesman Scott Silvestri said the bank views the settlement as "a constructive conclusion" to the matter. "In our presentation today we demonstrated that not one penny of taxpayer money will be included in the payment of the settlement, and the SEC complaint does not allege that anyone did anything intentionally wrong or knowingly wrong," he said.

SEC spokesman John Nester had no immediate comment.

Rakoff said he could not reconcile the SEC's position that Bank of America "effectively lied" to shareholders with its decision not to force the Charlotte, N.C.-based bank to admit wrongdoing.

Noting that the government had pumped $45 billion of taxpayer money into Bank of America from the federal bank bailout plan, including $20 billion to help absorb Merrill, Rakoff said that "one might infer that public money was used, in effect, to pay the bonuses.

"Don't I need to know what the truth is before I could make a determination here?" Rakoff said. "Is there not something strangely askew in a fine of $33 million?"

Bank of America denied misuse of the bailout money. "This is not a case in which there is any risk or threat to TARP funds," Lewis Liman, a lawyer for the bank, told the judge.

The judge directed both sides to make new submissions on Aug. 24 and Sept. 9.

Did the CEOs Know?

According to the SEC complaint, Bank of America told investors in proxy documents that Merrill agreed not to award bonuses or incentive pay before the merger closed, when in fact the bank had authorized Merrill to pay bonuses.

Rakoff appeared skeptical that Kenneth Lewis and John Thain, the chief executives of Bank of America and Merrill, should not be held to account for the decision not to disclose the bonuses to shareholders before they voted on the merger.

"If you are correct that this proxy statement was materially misleading," Rakoff told an SEC lawyer, "then at a minimum Mr. Thain and Mr. Lewis would seem to be responsible for that." He asked rhetorically whether "some sort of ghost" were responsible for drafting the bonus agreement.

Maureen Lewis, an SEC lawyer, responded that Lewis and Thain "relied on the lawyers' advice and didn't know what was in the disclosure schedule."

The $33 million penalty was below the $50 million that General Electric

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[GE  Loading...      ()   ] agreed last week to pay to settle SEC fraud charges.

Lawyers said it is rare for judges to delay so-called SEC consent agreements, but Rakoff has done it before.

In 2003, he blocked a $500 million settlement with WorldCom over the accounting fraud that led to the phone company's bankruptcy. He later approved a $750 million payout.

The Merrill merger has weakened Lewis, whose bank faces many lawsuits, regulatory probes and anger of shareholders and lawmakers over the bonuses and the extent of Merrill's losses.

Since April, Lewis has lost his job as chairman and more than half of his long-supportive board of directors.

In a separate case, Bank of America agreed to pay $55 million to settle a lawsuit by former Countrywide Financial employees over losses in their retirement accounts.

Bank of America acquired what had been the largest U.S. mortgage lender in July 2008.

Shares of Bank of America have fallen 51 percent since the Merrill merger was announced last Sept. 15. They closed Monday up 26 cents at $16.68 on the New York Stock Exchange.

• Slideshow: Largest Bank Failures of 2009

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