Bank of America Corporation
) 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.
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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
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.
), The Goldman Sachs Group, Inc. and
State Street Corporation
) have settled similar charges with the SEC pertaining to the
sale of CDOs. Moreover,
) 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).