WASHINGTON (12/16/13)--Bank of America reached an agreement Thursday with the Securities Exchange Commission (SEC), resolving allegations of illegal activity from the housing bubble era.
The bank will pay $131.8 million for Merrill Lynch's failure to disclose a conflict of interest in mortgage securities packaged and sold to investors in 2006 and 2007. Merrill Lynch was acquired by Bank of America during the stock market meltdown in September 2008.
Federal regulators had accused Merrill of failing to reveal that the Evanston, Ill.-based Magnetar Capital held influence over which mortgage securities were bundled together and that the hedge fund had bet against the financial instruments.
A July 13, 2006, email from a Merrill sales representative to a Magnetar principal revealed that the bank believed its "ultimate goal" was to maximize the hedge fund's return "with the best structure possible" (Reuters Dec. 12).
Magnetar itself was cleared of wrongdoing by the SEC.
The collateralized debt obligations at the heart of the deals, called Norma CDO and Octans 1 CDO, were sold in 2006 and 2007 for a combined face value of $3 billion. The agreement also included a third security, Auriga CDO, worth $1.5 billion, that Merrill had also sold for Magnetar and others. The SEC found that Merrill failed to record relevant trades in a timely fashion and charged the bank with bookkeeping violations. Bank of America agreed to pay $75.5 million in penalties and interest.
The SEC also reached a $472,000 settlement Thursday with two managing partners of NIR Capital Management, a firm that oversaw and managed the packaging of securities for the $1.5 billion Norma CDO deal. The regulator said Scott H. Shannon and Joseph G. Parish III did not initially know of Magnetar's involvement but made no objections after learning about it. Merrill had told investors that assets within Norma were aggregated solely by NIR, according to the SEC. Neither Shannon, Parish, nor Bank of America admitted or denied wrongdoing in the settlement.
A spokesperson for Bank of America told The New York Times that it had already set aside reserves to cover the cost of the settlement.
Magnetar selected and bet against securities at the heart of another high-profile civil case brought by the SEC against JPMorgan Chase. In June 2011, the bank agreed to pay $153.6 million to settle fraud charges regarding an instrument called Squared CDO 2007.
Bank of America is gearing up for more housing crisis-related litigation, it was also revealed Thursday. Vermont Attorney General William Sorrell is suing the bank for allegedly violating the state's foreclosure mediation and consumer protection laws (Burlington Free Press Dec. 12).
State prosecutors accuse the bank of failing or refusing to comply with mediation settlements by billing homeowners in foreclosure for sums exceeding the agreed-upon maximum. They also said the bank misrepresented amounts owed and the status of foreclosure actions in letters to homeowners.