A furious judge has rejected a proposed out-of-court settlement that would have seen Bank of America pay $33m (£20m) to resolve claims that it lied to shareholders during the takeover of Merrill Lynch last year.
In an almost unprecedented move, US District Court Judge Jed Rakoff said the settlement was not fair or reasonable, and that BofA would have to explain itself at a trial next February. That will pile additional pressure on Ken Lewis, the bank's chief executive, who has already been warned that he personally might face civil charges from the New York attorney general.
Last night's ruling is also another embarrassment for the Securities and Exchange Commission, the regulator which negotiated the proposed settlement.
BofA agreed in August to pay the $33m fine, but without admitting that there were misleading statements in the documents it sent to shareholders ahead of a vote on the Merrill deal.
Judge Rakoff said the settlement looked like "a contrivance designed to provide the SEC with the façade of enforcement and the management of the bank with a quick resolution of an embarrassing inquiry – all at the expense of the sole alleged victims, the shareholders".
The damning ruling came despite the judge saying he recognised that out-of-court settlements were almost universally better than having an expensive trial. But he concluded: "The parties were proposing that the management of Bank of America – having allegedly hidden from the bank's shareholders that as much as $5.8bn of their money would be given as bonuses to the executives of Merrill who had run that company nearly into bankruptcy – would now settle the legal consequences of their lying by paying the SEC $33m more of their shareholders' money.
"This proposal to have the victims of the violation pay an additional penalty for their own victimisation was enough to give the court pause."
The SEC accused BofA and its directors of making "materially false and misleading statements". In its proxy statement ahead of a shareholder vote on the Merrill deal last December, BofA said it had agreed that Merrill would not pay bonuses for 2008 until after the new owners took charge, but in fact no such agreement existed.
In a secret memo drawn up after talks last September, as Lehman Brothers collapsed and Merrill's future hung in the balance, Merrill was authorised to pay up to $5.8bn in bonuses. In the end, Merrill distributed $3.6bn in its dying days as an independent company, a fact that infuriated Mr Lewis so much that he fired Merrill's boss John Thain within weeks of taking over the company on 1 January.
Judge Rakoff suggested the SEC should pursue the executives who authorised the proxy statement or the lawyers who advised them. BofA, meanwhile, says the proxy statement did not materially mislead investors.