Judge says BofA's $33m fine is not enough

Bank of America's agreement to pay $33m (£20m) to settle charges it misled its shareholders over investment banking bonuses is "not remotely reasonable" if the charges are true, a judge declared yesterday.

In a Manhattan court, Judge Jed Rakoff refused to rubber-stamp the deal, agreed between BofA and the Securities and Exchange Commission last week, saying the fine was far too small compared to the sums of money in dispute.

The SEC alleged that BofA and its directors made "materially false and misleading statements" when they asked investors to approve the acquisition of Merrill Lynch, the investment bank, in December. BofA said then that it had agreed Merrill would not pay bonuses for 2008 until after the new owners took charge, but in fact no such agreement existed. In fact, in a secret memo drawn up when the acquisition was negotiated, 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.

BofA agreed to the settlement with the SEC without admitting wrongdoing, but Judge Rakoff said he had "misgivings" about how the figure of $33m was reached. "When this settlement first came to me it seemed to me to be lacking, for lack of a better word, in transparency," he said. If BofA broke the law by not disclosing the bonuses, "is there not something strangely askew in a fine of $33m?" he asked.

The judge ordered both sides to return with more information later this month, delaying any settlement deal until at last early September and marking another blow to BofA chief executive, Ken Lewis, who is battling a string of legal assaults against his handling of the Merrill acquisition. If Judge Rakoff decides there is enough evidence that BofA did break securities laws, he could order the two sides to come up with a much more expensive settlement or prepare for a trial.

Elsewhere another bank, State Street, said yesterday that it may have to pay more than $625m to deal with claims that it put its most risk-averse investors into toxic sub-prime mortgages. SEC staff have recommended that the agency launch a fraud prosecution against it.

Some 28,000 individuals' pension funds were part-invested with two State Street bond funds which had begun to invest in subprime mortgages, and which plunged in value in 2007. The Boston-based bank had set aside $625m to cover the legal morass, but said that the reserve "may not be sufficient to address ongoing litigation" if the SEC sues and seeks monetary penalties.