Recently, Bank of America Corporation (BAC) reached settlement with the Securities and Exchange Commission (SEC) related to allegations concerning the sale of collateralized debt obligations (CDOs). The SEC imposed a penalty on Merrill Lynch Co., which was acquired by BofA in 2009. The CDOs were sold during 2006–2007.
BofA will pay $131.8 million to settle the charges. Of the total amount, the company will pay $56.3 million each as disgorgement and fine, while the remaining $19.2 million is the prejudgment interest. Notably, the company did not admit any wrongdoing but at the same time agreed to desist from the future violation of federal rules.
The settlement relates to Octans I CDO Ltd., Norma CDO I Ltd. and Auriga CDO Ltd. The SEC charged BofA for misleading investors while marketing and selling Octans I CDO and Norma CDO I. Further, the SEC accused BofA of violating the books-and-records requirements of Auriga CDO.
The SEC accused BofA of failing to disclose that hedge fund firm Magnetar Capital LLC had an equity stake in these two CDOs. Additionally, Magnetar had played an important role in selecting the collateral for CDO that BofA marketed and sold.
However, Magnetar had placed a bet that some of the assets that were included in the CDO would fail and BofA did not inform about this to investors who bought these CDOs. Thus, the investors failed to make an informed investment decision as they were unaware of BofA's conflict of interest with Magnetar.
Further, the SEC penalized NIR Capital Management – the firm that supervised the selection of securities for Norma CDO I – for not raising objections even after gaining knowledge of Magnetar’s role. The firm will pay $472,000 as fine.
The SEC’s actions against banks for their conduct leading to the financial crisis have somewhat restored investors' confidence in law enforcement agencies. Several other banks including JPMorgan Chase & Co. (JPM), The Goldman Sachs Group, Inc. and State Street Corporation (STT) have settled similar charges with the SEC pertaining to the sale of CDOs. Moreover, Barclays PLC (BCS) and Deutsche Bank AG, which faced investigations related to the same issue are yet to be penalized.
Currently, BofA carries a Zacks Rank #3 (Hold).
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