Judge Rejects BofA Settlement Over Merrill Purchase

U.S. District Court Judge Jed S. Rakoff of New York said the agreement with the Securities and Exchange Commission, under which the bank would pay a fine of $33 million for misleading investors,"does not comport with the most elementary notions of justice and morality."

The case dates back to the height of last year's financial crisis. At the time, Merrill faced imminent bankruptcy and federal authorities feared its collapse could cascade through the banking system. In a last minute deal arranged by the Treasury Department, Bank of America agreed to buy Merrill, pending shareholder approval.

It was the form of that approval that caused the SEC to initiate proceedings against Bank of America. According to its complaint, the bank failed to tell shareholders that it had committed to paying as much as $5.8 billion in bonuses to Merrill executives.

Bank of America eventually settled the charges for $33 million, but the agreement quickly came under harsh scrutiny from Judge Rakoff, who demanded to know who had made the initial decision not to reveal the agreement about bonuses.

In response, the bank blamed its own attorneys while the SEC defended the justice of the settlement in a series of court filings that argued that Rakoff has limited authority to peer into the bank's operations.

Rakoff rejected those arguments, as well as the settlement, in a blistering decision this week. He told both parties to return to court in February for a trial on the issues.