## Facts

- Bank of America Corporation (BofA) agreed to acquire Merrill Lynch & Co. in 2008 during the financial crisis.  
- The merger agreement permitted Merrill to pay up to $5.8 billion in discretionary year-end bonuses to certain Merrill executives before closing.  
- The proxy materials sent to BofA shareholders disclosed that Merrill could pay bonuses in the ordinary course of business but did not clearly disclose the existence, size, and timing of the specific bonus arrangement.  
- BofA’s management and counsel knew of the bonus agreement and its significance but allowed shareholders to vote on the merger without full, specific disclosure of the Merrill bonus plan.  
- After the merger closed, Merrill reported unexpectedly large losses and the previously undisclosed bonuses became public, generating substantial controversy.  
- The Securities and Exchange Commission (SEC) brought a civil enforcement action against BofA, alleging that the proxy disclosures were materially misleading in violation of federal securities laws.  
- The SEC and BofA quickly negotiated a settlement in which BofA would pay a $33 million civil penalty without admitting or denying wrongdoing.  
- The parties jointly sought judicial approval of the consent judgment from the U.S. District Court for the Southern District of New York (Judge Jed S. Rakoff).  
- The court expressed concern that the proposed settlement imposed costs on innocent shareholders, did not identify or meaningfully hold individuals accountable, and failed to explain how the penalty amount was adequate or in the public interest.  
- In subsequent proceedings (including the 2010 opinion), the court continued to scrutinize the proposed and revised settlements, focusing on transparency, accountability, and whether the resolution truly served investors and the public.

## Issues

1. Whether Bank of America’s proxy statement and related disclosures to shareholders regarding Merrill Lynch’s bonus arrangements were materially misleading in violation of the federal securities laws.  
2. Whether the court should approve the negotiated consent judgment between the SEC and Bank of America, including the proposed monetary penalty, under the standard that such settlements must be fair, reasonable, adequate, and in the public interest.  
3. Whether a settlement that effectively penalizes shareholders while failing to clearly identify the responsible individuals or provide adequate factual basis for liability and penalty can satisfy the public-interest requirement for SEC enforcement resolutions.  

## Decision

- The court refused to approve the SEC–BofA consent judgment as originally proposed, finding it neither fair nor reasonable nor in the public interest.  
- The court held that the proxy disclosure about Merrill’s bonuses was, at minimum, highly suspect and likely misleading, because it failed to convey material details about the bonus arrangement to shareholders before they voted.  
- The judge criticized the SEC for accepting a settlement that imposed financial penalties on shareholders (through corporate funds) rather than on responsible officers or directors, without adequate explanation.  
- The court emphasized that it had an independent duty to review consent judgments for fairness and public interest, and would not act as a mere “rubber stamp” for agency settlements.  
- In later proceedings and a revised settlement, the court continued to insist on a stronger factual record, more meaningful remedial measures, and greater clarity regarding accountability before granting approval.  

## Legal Principles

- **Material Misstatement or Omission (Securities Laws):** Issuers violate federal securities laws, including § 14(a) of the Securities Exchange Act and related rules, when proxy materials omit or misrepresent material information that a reasonable shareholder would consider important in deciding how to vote.  
- **Duty of Full and Fair Disclosure:** When seeking shareholder approval for a transaction such as a merger, corporations must provide accurate, complete, and non-misleading disclosure of key terms, including significant compensation or bonus arrangements that bear on the economics of the transaction.  
- **Judicial Review of SEC Settlements:** Courts must independently evaluate proposed SEC consent judgments for fairness, reasonableness, adequacy, and consistency with the public interest; they may not simply defer to the agency without meaningful scrutiny.  
- **Public Interest and Accountability:** A settlement that imposes financial penalties on the corporation (and hence its shareholders) but fails to meaningfully hold individuals responsible, or to provide a clear factual basis for the penalty and alleged wrongdoing, may not serve the public interest.  
- **Transparency in Enforcement:** SEC settlements should contain sufficient factual detail to inform investors and the public of the nature of the misconduct, both to vindicate the purposes of the securities laws and to maintain confidence in enforcement.  

## Conclusion

Securities and Exchange Commission v. Bank of America Corporation underscores that proxy disclosures in major transactions must fully and clearly reveal material compensation arrangements, and that federal courts have an active role in policing SEC settlements. The case stands for the principle that consent judgments in securities enforcement actions must be substantively fair, adequately justified, and aligned with the public interest, rather than shifting costs to shareholders while shielding responsible individuals from accountability.


Securities & Exch. Comm’n v. Bank of Am. Corp., 653 F. Supp. 2d 507 (S.D.N.Y. 2009), 2010 U.S. Dist. LEXIS 15460 (S.D.N.Y. 2010)