WASHINGTON (MarketWatch) -- Bank of America Corp. agreed to pay a $33 million penalty to the Securities and Exchange Commission, which said the mega-bank misled shareholders about billions in bonuses paid to Merrill Lynch executives before completing its controversial $50 billion acquisition of the huge brokerage firm.

"The SEC alleges that in proxy materials soliciting the votes of shareholders on the proposed acquisition of Merrill, Bank of America stated that Merrill had agreed that it would not pay year-end performance bonuses or other discretionary compensation to its executives prior to the closing of the merger without Bank of America's consent," the SEC wrote.

"In fact, Bank of America had already contractually authorized Merrill to pay up to $5.8 billion in discretionary bonuses to Merrill executives for 2008."

According to the SEC's complaint, which is subject to court approval, Bank of America (BAC) said in a November, 2008, joint proxy statement for the acquisition that Merrill said it would not pay year-end bonuses to top executives before closing without Bank of America's consent.

However, the SEC alleges that Bank of America had a prior agreement to pay bonuses.

"The disclosures in the proxy statement were rendered materially false and misleading by the existence of the prior undisclosed agreement allowing Merrill to pay billions of dollars in bonuses for 2008," the SEC said.

The SEC's complaint was filed in the U.S. District Court for the Southern District of New York. The settlement alleges that Bank of America violated its fiduciary duty to shareholders by failing to disclose key details about bonuses and other incentives going to Merrill Lynch executives as part of the acquisition.

"Unbeknownst to shareholders, the schedule was already in place weeks before the proxy statement was filed with the SEC and disseminated to shareholders," the SEC said.


The settlement comes after a busy last week of July for executive compensation. On July 31, New York Attorney General Andrew Cuomo released a report that Wall Street's largest financial institutions paid awards of at least $1 million to roughly 4,800 executives and employees. That was followed the next day by the House of Representatives taking action to reign in executive compensation by approving legislation that would give shareholders and bank regulators a greater say in the pay of top corporate officials.

Columbia Law School Professor John Coffee said he was surprised that the settlement did not require Bank of America's board to hire an outside investigator to examine who made the false statements.

"Corporation's don't tell lies, someone within the corporation lies," said Coffee. "If you have a problem with this company's disclosures, you want to know who was responsible for the misstatement."

Claudia Allen, partner at Neal Gerber & Eisenberg, said the settlement represents a new climate in the SEC's enforcement division.

"These Merrill bonuses were front and center over the last several month, in connection with the public's outrage around the large amounts of taxpayer aid going to banks," said Allen. "In addition to sending message that disclosure is important, the SEC is sending a message that its enforcement division is looking to take action when it comes to failures to disclose."

Will Lewis go?

Coffee said he was not surprised that Bank of America agreed to a settlement, noting that a court case "could be destabilizing" for the bank's chairman, Ken Lewis and Bank of America. "This is surprisingly empty as far as settlements go," Coffee said. "Bank of America and Lewis does not want to have this litigated."

Lewis already is under pressure from some shareholders to have Lewis step down. CtW Investment Group, an organization that advises pensions for unions, continued its campaign to have Lewis ousted.

"Following today's announced SEC lawsuit against Bank of America, the CtW Investment Group calls on the BofA Board of Directors to replace Ken Lewis - who bears ultimate responsibility for the disclosure failure - with a CEO who will restore investor and regulatory confidence and claw back the $3.6 billion in premature bonuses surreptitiously paid to Merrill Lynch executives," the group said.

Lewis stepped down as Bank of America chairman, but remained as CEO, after the company's 2009 annual meeting.

However, Richard Bove an analyst at Rochdale Research said he doesn't believe the SEC suit will harm the company or force Lewis to resign.

"It is just another indication of the storm of political wrath about to be unleashed on the American financial industry," Bove said. "Lewis is supported by the Board, the bank's employees, large institutional investors, analysts who follow the company, and the prior managers of the bank."

Lawmakers take issue with Lewis and regulators

The SEC charges come after Federal Reserve Chairman Ben Bernanke, Bank of America Chief Executive Ken Lewis and former Treasury Secretary Henry Paulson have received a barrage of criticism from lawmakers over the past couple months.

Paulson and Bernanke have recently responded to a wide-variety of concerns expressed by lawmakers, ranging from criticism that they ordered Bank of America Chief Executive Ken Lewis to go through with the Merrill Lynch acquisition against his will, to questions why they didn't oust the bank's management and board upon providing government assistance.

The concerns on Capitol Hill are being examined as part of an investigation being conducted by the House Oversight and Government Reform Committee, which expects to still hear in the fall from former SEC Chairman Christopher Cox and Federal Deposit Insurance Corp. Chairwoman Sheila Bair on the subject.

The SEC said it received assistance in its investigation -- which it said is ongoing -- from the U.S. Attorney's Offices for the Southern District of New York and the Western District of North Carolina, the Federal Bureau of Investigations, and the Office of the Special Inspector General for the Troubled Asset Relief Program.

Coffee said that the statement could indicate that the SEC may be conducting a criminal investigation.

Tip of the iceberg?

However, some congressional critics also argue that Bank of America's Lewis, the Fed and Treasury department failed to disclose to the SEC and shareholders details about widening losses at Merrill Lynch in November prior to a shareholder vote on the deal in December. The complaint does not make any suggestion that Bank of America failed to disclose these details to shareholders.

According to a Democratic staff memo, Bank of America "arguably should have filed a Form 8K" with the SEC, publicly disclosing information about the losses to investors before they voted on the combination.

Rep. Darrell Issa, R-Calif., ranking member of the Oversight and Government Reform Committee, said the SEC's charges against Bank of America are a validation of the committee's concerns.

"While the settlement Bank of America reached with the SEC does not include an admission of liability, the circumstances certainly underscore the need for us to continue our investigation of the Bank of America - Merrill Lynch acquisition and the role officials at the Treasury and Federal Reserve had in pressuring the acquisition to move forward," said Issa.

Rep. Ed Towns, D-N.Y., chairman of the committee, said he was "pleased" to see the SEC is pursing issues around the deal. "The Committee's hearings and our ongoing investigation have uncovered very troubling facts that we will continue to explore," said Towns.

Management changes at Bank of America

Bank of America's Lewis announced management changes on Monday. He announced that the bank's consumer and small business banking division, Liam McGee, is leaving and will be replaced with Brian Moynihan, another top official at the bank.

Tom Montag, who currently runs Global Markets for the company, will run Global Corporate and Investment Banking and Sallie Krawcheck, is leaving Citigroup to run Bank of America's Global Wealth and Investment Management unit.

David Darnell, who runs Global Commercial Banking, will now report directly to Lewis.