Kucinich Asks SEC About Bonus Materiality and Lack of Disclosure

Rep. Dennis Kucinich (D-OH) has written to SEC Chair Mary Schapiro asking her to respond to questions about Bank of America's failure to disclose information to its shareholders about Merrill Lynch's bonus plan. Kucinich wrote that BOA shareholders did not know when they voted on the BOA and Merrill Lynch merger agreement that BOA had agreed to allow Merrill to award up to $5.8 billion in performance bonuses. Kucinich asked Schapiro to advise by 5 p.m. on April 10, 2009 whether the SEC believes that the failure to include the bonus information was a material omission and, if so, what steps the SEC will consider in response.

Kucinich cited the brief filed by the Attorney General of New York on March 11 outlining BOA's failure to disclose to shareholders the very large discretionary bonuses that would be offered by Merrill prior to closing the merger deal with BOA. BOA did not disclose the attachment to the merger agreement which outlined the details of the bonuses under Merrill's variable incentive compensation program.

Kucinich wrote that when his staff asked BOA about its decision not to disclose the bonus information prior to the shareholder vote, BOA advised that it had disclosed everything that was required to be disclosed. BOA said it was not required to disclose to shareholders prior to the December 5, 2008 vote the details about the size or timing of the bonuses. Kucinich said that BOA's response raises questions about the SEC's interpretation of the fiduciary duty to disclose all material information to shareholders when requesting shareholder action, and what constitutes material information under the proxy rules.

Kucinich pointed out that Merrill's bonuses were 22 times larger than those paid at AIG. The bonuses represented more than 10% of the merger deal at signing, he said and its proportion increased relative to the value of the deal at closing. He also noted that the bonuses were equivalent to 36.2% of the money received from the Treasury under the Troubled Assets Relief Program. The TARP funds were allocated to Merrill and awarded to BOA after the merger.

Kucinich also noted that the bonuses were awarded in a manner that departed from company policy. The bonuses were decided by the compensation committee at a December 8, 2008 meeting shortly after BOA shareholders approved the merger but before the fourth quarter financial results were available. The policy under the variable incentive compensation program was that bonuses would reflect all four quarters of performance and would be paid out in January or later, according to Kucinich. The bonuses were paid before the fourth quarter performance was determined.

Kucinich said that BOA had both knowledge of and influence over Merrill's intent to pay the bonuses even before it took control of Merrill. Any bonus awards were to be made in consultation with BOA, he said. BOA chose not to disclose the details of Merrill's bonuses even though it was concerned enough about the fourth quarter losses that its CEO met with the Treasury Secretary to discuss a possible withdrawal from the deal to acquire Merrill.

Merrill employees who had a salary of at least $300,000 and held the title of vice president or higher qualified for the bonuses, which were mostly paid in cash. Kucinich said it was difficult to see what consideration Merrill received in exchange for the bonuses since they did not correlate with performance and they were not retention bonuses. They were "little more than a farewell gift from management to themselves," he said.

Kucinich cited the Supreme Court decision which held that an omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. There is no question, in his view, that a reasonable BOA shareholder would have considered the bonuses material to their decision on whether to approve the merger.

Kucinich asked the SEC to provide the Domestic Policy Subcommittee which he chairs with more insight into its enforcement of the materiality standard as it applies to disclosures to shareholders. He noted that BOA is holding a shareholder meeting later in April at which directors will be elected and asked about the circumstances in which the SEC might order BOA to provide the bonus information to shareholders in advance of that meeting.