enforcer at the securities and exchange commission. it is the policy that all witnesses will be sworn in. do you solemnly swear to tell the truth, the whole truth, and nothing but the truth? if so, answer in the affirmative. let the record reflect that he answered in the affirmative. you may began. >> thank you. i am the director of the division of enforcement of the securities and exchange commission. i became the director on march 29 of this year. thank you for the chance to testify on behalf of the acquisition of merrill lynch by bank of america. . ll lynch. the committee's invitation asks

about the litigation against bank of america. because the enforcement action is ongoing, discussion of certain aspects pose a risk of negatively affecting our case. i'm happy to discuss elements of our publicly filed court papers. the complaint in our case concerns a november 2008 joint proxy statement that bank of america and merrill lynch sent to shareholders soliciting approval. it contains material faults and misleading statements. merrill lynch agreed not to pay yearend performance bonuses to executives prior to the closing of the merger without bank of america's consent.

they already consented to merrill lynch's payment of up to $5 billion and other bonuses to the executives. that is misleading and false. at the time we filed our complaint the commission sent a judgment for the court's consideration under which bank of america agreed to settle on terms that included payment of $33 million and the entry of an injunction prohibiting it from further proxy solicitation violation. as you know the judge declined to improve the settlement. the litigation is thus ongoing. the discussion is available in the litigation to further pursue the facts and to determine whether or not additional claims are appropriate. in determines how to proceed, we will, as always, be guided by what the facts warrant and the

law provides. with regard to the proposed settlement we believe it was reasonable, appropriate and in the public interest and also properly balanced to relevant factors that must be considered when assessing any summit. where a corporate issuer fails to meet statutory obligations, the need is paramount. the proposed penalties which would have been the second largest ever imposed would have sent a clear message that proxy solicitations must include the substance of separate, nonpublic documents. when the failure to do so resulted in emission. it clearly communicated to shareholders and the public that management had failed to keep the company in compliance with security laws and undercut the positi position.

these octoberives would be would have been in a way that did not place a burden on shareholders. although the penalty is a cig amount. it's not likely to have an impact on individual, innocent shareholde shareholders. you have also asked why our complaint did not charge individuals. the securities provision that governed statements are directed to those who solicit proxies or in whose names proxies are solicited. as such bank of america had a legal obligation that we allege it failed to meet to establish that individuals aided and abetted in proxy violation or committed fraud under securities laws it is necessary to prove we did not believe we could insert

it properly under the applicable legal standards. we have followed and will continue to follow any additional evidence developed wherever it leez. they will also continue to vigorously pursue penalties from individuals including corporate executives. in fact, as outlined in my written testimony the commission recently file ad number of enforcement actions against corporate executives charges violations of the federal securities laws and seeking extensive remedies. i look forward to answering your questions.

what does the sec believe bank of america did wrong? what do you think happened here that was wrong? >> mr. chairman, in our complaint we alleged that the to vote to approve h was the merger there was already an agreement that bank of america would allow him to pay up to $5.8 million in exactly those kinds of bonuses. the proxy was misleading because it suggested that no consent had

been given and no such bonuses would be paid without such consent when in fact the consent had already been given. >> i know you're a serious prosecutor. that's what we need in this day and age. what can we expect going guard in terms of aggressive enforcement against corporate wrongdoers? what can we expect from this point on? we're talking about a lot of money here. >> in the mortgage fraud area alone we have charged ceos, cfos, or other senior executives in new century, countrywide, american home mortgage, brook street securities, we charged hank greenburg and another official at aig. just in the recent past we have gone vigorously after those

individuals who we believe were heading in company that engaged in one form or another of fraud or wrong doing particularly with respect to mortgage and mortgage related products. we're working on streamlining the processes and making ourselves more responsive. but we are reinvigorated and rededicated to that effort. >> but you do feel that you have the tools to be able to do the job that needs to be done? no legislation or anything is required in order to be able to move forward with this aggressive approach that -- you know, the word around here is robust approach. >> robust, yes. well, we have a number of legislative proposals that we have presented, particularly involving hedge fund registration, the creation of essential clearing party for

derivatives transactions. more and better information on exactly the kind of trading and activity that goes on in some of these over the counter and opaque markets. in addition we've sought legislation regarding nationwide service a process and some other things to help make our job easier. we have sbties we're responsible for. credit rating agencies, that's before we get the hedge fund registration and despite those numbers, enforcement staff is 1,100 total. i think that additional funding would also go a long way towards helping us complete our mission. >> all right. thank you very much. thank you for your testimony. i now yield to the gentleman from california.

ranking member. >> thank you, mr. chairman. i know you were not on board on december 18th of last year. but are you familiar with the document dated december 10th, which was delivered to the fed on that date, which is called the fourth quarter '08 walkdown, so-called walkdown document? >> i do not believe i've seen that, congressman. >> mr. chairman i ask you now these be place on the record at this time. it's already in our information. >> without objection. >> december 17th, i believe it was delivered. it would not probably surprise you to know that it actually on page six it lays out those bonuses. mr. bernanke, mr. paulson had that on those days in december.

had you been in the room when this was delivered, in other words, you, the sec, would you have then been aware of the failure of the proxy in time to at least begin action at that point in december? >> well, you would would have to know exactly what was said in the proxy and then compare that to the information that was then available. >> but you knew that? you have compliance people. you are hand and hand and you get paid to make sure that the public is protected throughout the process of a merger. so let me ask you the real question, we're the government oversight committee and it is a double entaund ra because we oversee the government, we're also the government entity that oversees things that are outside of the government. in this case, the federal reserve, the treasury and the s.e.c., as i understand it through testimony again and again, the s.e.c. was locked out of this process during that time and did not get into the process until january, isn't that

correct? you were not -- your agency was not informed of what the fed was doing or the treasury was doing and you were not at these meetings. you were conspike wacuous in yo absen absence, right? >> yes. >> the respect the treasury and the fed should share in the future, shouldn't you be at the table if tens of billions of dollars of taxpayer's money are being thrown in to complete a merger and at the moment that a -- an executive, a party says i'm looking at the mac clause, i'm looking at breaking up this because things have changed or things were not disclosed or we have learned something, wouldn't that, in your opinion, be an absolute mandate for the security exchange commission to be in the room from that time forward? >> well, congressman, i think if it was a matter that impacted on the s.e.c.'s jurisdictional responsibilities with respect to shareholder disclosure, regulation of securities markets, the answer is yes.

>> now i'm going to ask you a hypothetical but not much of a hypothetical. if you had been in the room on december 17th, 18th, 19th, if you had been in the room when they said this is not going to go forward because there have been material adverse effects and on top of that, you were aware of misstatements in the proxy, would you have interjected at least your oversight, your opinion, and your demand that compliance to law be adhered to which it wasn't? >> well, i'm not sure i would have commented on whether or not a mac clause was properly invoked or not. >> but we already had testimony that if they invoked the mac, they have to go back to the stockholders. >> right. >> and the federal government came in with $20 billion. and there is some debate about whether it was forced on b of a or if b of a demanded it.

regardless of which one that is, at that point when there is new money, a mac clause or money in lieu of and on top of that material misinformation in the proxy, shouldn't you be in the room? and more importantly, if you are in the room, wouldn't you have acted to at least advise -- let's assuming you're willing to take on the fed chairman and the secretary of the treasury -- that in fact they're crossing lines at that point that should not be crossed, they're failing to disclose to the very stock holders, the public that you protect? >> well, if those events triggered a disclosure obligation we would certainly communicate that. >> for christ sake, we had five, six hearings. mr. kucinich has dedicated a whole wall of his library to this very question. and you're saying if? let's go back again. they failed to disclose these bonuses. it became -- the fed and the treasury became aware of that. they also became aware that these losses were mounting and

through a negotiation behind closed doors in which you were locked out, they negotiated additional money, now repaid, but additional money to make b of a go through this deal or to encourage or on their demand to have them go through. so all of that occurred with your agency locked out of the room. are you going to tell me today if there was something to be reported, are you going to say like sheila bair that was here earlier, yes, i would like to have been in the room and if i had been in the room or when i was in the room i wish i had said or done more? which is it? are you going to say the s.e.c. should darn well be in the room and be protecting stockholders, or are you going to say if, if, if today? which one is it? >> no, i'm sorry. perhaps i didn't make myself clear. >> i think i did. >> yes, you did, congressman, very clear. my only point was that we would certainly like to be in the room anytime there are discussions that go on that affect shareholders and the entities and individuals that we regulate and protect.

my only point was the more modest one, whether or not discussions about invoking a mac clause necessarily trigger disclosure obligations under the federal securities laws. >> thank you. thank you, mr. chairman, for your indulgence. we made the point that mr. kucinich and i have been wanting to make and look forward to, and we continue to follow up on it. i yield back. >> at this time i yield to the chair of the domestics policy subcommittee, the gentleman from ohio, mr. kucinich. >> at the outset of my friend from california, there is a distinction between what you're discussing and what our subcommittee has been doing. and that is that you're talking about disclosure events that occurred after the shareholder vote. our focus, in this subcommittee, has been about disclosure events before the shareholder vote. now, mr. khuzami, my subcommittee investigation has found that bank of america relied on the november 12th forecast for fourth quarter 2008

created by merrill lynch, that omitted any forecast of how collateralized debt obligations, subprime mortgage-backed securities, credit default swaps would perform in the quarter. the former merrill cfo admitted to staff at the november 12th forecast was not, in fact, a valid forecast. bank of america knew at the time that the november 12th forecast was of questionable validity, in quotes. bank of america did not do any actual financial analysis to make up for the merrill omissions. instead, bank of america merely pulled out of thin air a number on november 13th, which was recorded on the forecast document as the gut feeling of bank of america's chief accounting officer. the attorneys at bank of america and at waktle, lippen did not

question the information. and they advised bank of america not to make further disclosures to its shareholders in advance of the merger vote. based on the information in the deficient forecast and a gut feeling. the november 12th forecast omission of any projection for losses and the cdos and other liquid investments and the implication of merrill lynch would break even in those investments for the remainder of the quarter was material to the advice attorneys gave bank of america. now when i asked ken lewis about this at our first hearing, he told us he relied on advice of counsel. protecting shareholders is often in the final instance the responsibility of corporate general counsels and theirout side counsel. the subcommittee's investigative findings demand the question where were the lawyers? the glaring omissions and inaccurate financial data in the critical november 12th forecast, so obvious that they should have alerted the attorneys to the necessity of a reasonable investigation before making a

decision on bank of america's legal duties to disclose. the apparent fact they did not mount such an investigation makes the decision not to disclose merrill's losses to shareholders an egregious violation of securities laws. mr. khuzami, in march, gao issued a scathing report on the effect of christopher cox's leadership of the s.e.c. in reducing corporate penalties and formal investigations at exactly the time that the cdos and cdss were proliferating to chairman shapiro's credit, she rescinded a cox policy and appointed you to reinvigorate the enforcement division. i am concerned that one pernicious aspect of the cox legacy may have survived, the unwillingness to pursue as gao wrote, quote, more complicated cases those with industry wide implications in favor of those seen as more routine, unquote. mr. khuzami, this is the test case. this is the case with industry wide implications where what is at issue is the performance of

the attorneys and interpreting the nation's securities laws strictly or permissively. here's the case where the -- where at the s.e.c. shapiro breaks with the s.e.c.'s christopher cox. mr. khuzami, is the s.e.c. widening its investigation to include the issue of bank of america's failure to disclose to its shareholders the mounting losses at merrill lynch, known or knowable by mid-november, 2008, weeks before, weeks before the shareholder vote on the merger? >> congressman, we have been and are looking at all aspects of the activity with respect to the proxy statements including the fourth quarter losses of merrill lynch. >> is that a yes or a no? >> that's a yes. >> if it is a yes, then the work of this committee has been worthwhile, because you now have

a chance to do your job because we have done ours and the information that we have uncovered should facilitate your investigation. i thank the gentleman. i thank the chair. i yield back. >> thank you very much. now i yield to the gentleman from missouri, mr. luetkemeyer. >> thank you, mr. chairman. mr. khuzami, mr. bernanke and paulsen were negotiating with merrill lynch and bank of america and sort of came to an agreement, yet they didn't disclose this, didn't want to put it in writing the transactions that were about to embark on here and about to approve and had been working with. and my understanding is that at once they did that, that would have been a discloseable event that the s.e.c. would have been able to come in to and be a part of and have some oversight over. is this a -- what is your opinion of this transaction, how it all happened and this unwillingness to put this in writing? >> well, congressman, what the

law -- what the securities law require is that if that understanding had solidified to a material contract, then it would have been required to have been disclosed under what is known as form a case. bank of america would have had to make a disclosure if it rose to the level of an enforceable contract. and, you know, that's -- >> but isn't this skirting the law? by them saying we're going to have a little wink and nod agreement here and let's don't put this in writing, let's have a gentlemen's handshake on it. aren't they trying to subvert what is really the necessary part of a transaction, the disclosure to all of the parties involved? >> well, congressman, it wouldn't be appropriate to comment on my views of that in light of the ongoing nature of the investigation, but certainly

there can be circumstances where there is an enforceable contract, even though it is not formally written down in which case it may trigger the disclosure obligations. >> okay. following along then, the process, and if -- do you see something has happened here that you think needs to be changed in existing law? do we need to have something more clarified by the way that we have these transactions take place so that there is more disclosure? >> congressman, we sort of constantly review our disclosure rules and regulations to determine whether or not more disclosure or different disclosure is appropriate that process is ongoing now. the sarbanes oxley act required us to consider more real time or robust disclosure and that's a process that continues. we certainly take the experience here and determine whether or not we should change our rules and regulations appropriately. >> okay.

well, you still haven't said yes there is some things we need to do and they are -- can you fill in the blank there? >> the question whether or not events such as these should require more affirmative disclosure obligation is something that we're considering. so, for example, contracts or discussions short of a formal legally enforceable obligation, should that be disclosed even though all the term aren't finalized or interim results that may not rise to the level of a material impairment of an asset, the current standard, whether or not that should be disclosed. >> are you currently looking at doing that with your rules and regulations or do we need congressional action or what do you think we need to do? >> congressman, that's something we look at on a rig base us and we're looking at now. >> okay. as someone who has gone through this and been in the middle of it and we're in the process now congressionally to try and do something with this too big to fail situation, what do you see

that we're not doing with the legislations proposed that you think would be adventurous or a big aid to you or would be something we could do in the future to mitigate or minimize some of the things going on or have gone on? >> congressman, from an enforcement perspective, which is my perspective -- >> right. >> -- transparency and information is critical. we cannot determine if misconduct is going on in markets if we don't have complete and accurate and standardized information about what is going on. so, for example, registration of hedge funds which would require better reporting, and stronger compliance, and inspection authority would be highly beneficial. >> okay. the transparency and the registration is in the bill now, is that -- does it go far enough, too far? what's your opinion? >> if i might, i'm not sure i understand the full and complete details of what is in the current version of the bill, so if i could have an opportunity to respond to you, i would

appreciate that. but the same is true in the derivatives markets, we would like that kind of information. one case we brought, for example, recently involved insider trading which typically takes place in the equity world, in stocks, was actually going on in the credit default swap market. and yet we don't have nearly the same kind of information in that market as we do in the equities. >> okay. interesting. thank you, mr. khuzami. thank you, mr. chairman. >> gentleman's time has expired. and i now call on the gentleman from baltimore, mr. cummings, who is a very active member of this committee. >> thank you very much, mr. chairman. and mr. khuzami, i got to tell you, as i listen to my good friend and colleague congressman kucinich he said our work is done, and i don't think our work is done. and let me tell you why. as you know the s.e.c. in the case of the s.e.c. versus bank

of america, there was a settlement that was submitted to the federal court in new york on august 3rd, 2009. the settlement agreement provided for the bank of america to pay $33 million in fines for making false and misleading statements in proxy statements to shareholders. bank of america, of course, told shareholders that no year end bonuses would be paid to merrill lynch executives when in fact it had been agreed that bank of america would pay up to $5.8 billion in bonuses to merrill executives. putting aside the fact that $5.8 billion was to be paid to the executives of a company that was hemorrhaging money at the time, the decision to settle the matter for $33 million struck

many of us as being a perverse outcome. here was a company with $45 billion in government assistance, $20 billion of which was from this exact deal, and the securities and exchange commission let them pay a fine. and this is a piece that got me. pay a fine with our money, with taxpayers' dollars, does this strike you as fair to the taxpayer shareholders? does it fit your mission of protecting american investors? to me it is like you find somebody and then take somebody else's money to pay the fine and i'm trying to figure out where is the punishment in that? where's the enforcement in that? i mean if i'm sitting back, i say, oh, boy, i got a great day here. got the public's money to pay the fine. everything's fine.

i don't have to pay a dime. and then one of the things that i -- that i read about the settlement, once i read about it i fired off a letter to your inspector general, david coates, asking him to look into the settlement. i just read in mr. coates' recent semiannual report to congress that he is in the midst of this investigation and i look forward to his conclusions. one of the main reasons i requested the investigation was because i would not be the least bit surprised that in the aftermath of this crisis the fairer the securities laws violations are uncovered. and the violations may have occurred at a firm that has received government assistance. in that case, what is the calculus that is used to determine how to punish a company without penalizing the involuntary investors in the firm the taxpayers. i want you to understand, i'm

concerned about when we catch folks, what is the thinking that goes into the process of how to punish them? because to me,@@@@h)rrrr that you answered to is mr. shapiro, is that right? then straight up to her, is that right? >> yes. >> so help me with this. as a lawyer. then when i read this, i got so upset, because i said it makes absolutely no sense. and i know you got a great answer for me, and i'm waiting to hear it. >> congressman, first wrcht to the amount of the fine, the pents we establish have to be proportion nat to the actual wrong doing that occurred.

and here, the wrong doing was not the payment of the bonuses. that may be deceptive and wrong as far as corporate government and other matters. wrong as a policy matter, as a corporate matter, a number of other matter, but from a pure enforcement point of view, it was wrong to disclose to shareholders that they said that they would not pay bonuses without bank of america's approval when they had already agreed to pay the money. so the wrong was the deprivation of information to the shareholders in deciding how to vote, not the fact that the amount of money that was paid was illegal or improper in and of itself. we look at the wrongdoing which was the -- >> i got that. they had a duty to disclose, right? >> if they -- yes, they have a duty to make sure the statements in the proxy are not misleading. so the number of $5.8 million or $3.6 billion -- or $5.8 billion, $3.6 billion was ultimately

paid, is not, i don't think, the measure of the wrong. the wrong was that they did not tell shareholders who needed all the information they could to decide whether or not to vote. so that was the starting point. then we look at the amount, and we looked at our precedent in the proxy violation area, the largest fine we had imposed was $38 million give or take or so in a case involving frankly more egregious conduct than this because it involved manipulation of stock and obstruction and other things in addition to the proxy violation. next we try and balance the benefit of the -- the benefit of the penalty versus the burden on the shareholders. so we recognize that penalties that we assess may come out of the pockets of share holders who may themselves have been wronged. so we try to balance. we have to still impose the penalties because it sends a strong deterrent message to other corporations even other issuers that this kind of conduct will not be tolerated.

the deterrence message is critical. it tells others they shouldn't do it. it says if you do it, you'll pay a cost. incentivizes them to fix their own problems before we come knocking, and it allows us to leverage our limited resources so the companies voluntarily engage in corrective measures rather than us having to go to each one of them. the lawyers read these things, the corporate executives reed the decisions, implement changes. so there is many good reasons to have the penalty, but we don't want to burden the shareholder more than necessary. that's a balancing that we look at under our penalty guidelines and we come to the best determination that we can. >> my time is up. thank you, mr. chairman. >> the gentleman's time has expired. the gentlewoman from california, miss speiers. >> thank you, mr. chairman. mr. skkhuzami, i am deeply troubled by your description of what took place. you said that the bank misled the shareholders. the bank didn't mislead the shareholders.

it lied to the shareholders. it was a ball-face lie. on a proxy statement, if you make a bald-faced lie, i think that you should have a penalty that is so strong that you won't ever do it again. now the courts seem to believe that $33 million was insufficient. who initiated the settlement? >> congressman, this was a settlement that was -- >> who initiated it? did s.e.c. go to the bank of america and say, let's settle this or did the bank of america come to the s.e.c. and say let's settle this? >> i don't know the answer to that, congressman. typically settlements result from a, you know, both parties coming together and discussing the possibility. >> someone initiates it. and if you don't have the answer

today, i would appreciate if you would make that available to the committee. >> certainly. >> all right. you based your decision on the fact that there was a precedent where $38 million was fined in another setting. now, you know that the s.e.c. historically when you were not a member of the staff was reducing its enforcement actions dramatically. in fact a recent gao suddeny indicated the enforcement actions had been reduced by some 80% and the disgorgement actions by some 60%. presuming those figures are indeed accurate, i may be off a little bit, you're basing a decision on whether or not to impose a fine on a very anemic s.e.c. that was not doing a good job of enforcing the law. so i guess my real question to

you is if something is substantive, if something is significant, if it is a lie, shouldn't the penalty reflect that? and i'm not -- i'm not accepting the fact that somehow because there was another fine issued before that that somehow should be a measurement when we know that the s.e.c. wasn't doing its job, and finally, your argument that somehow you got to balance what happens to the shareholders, if that's the -- if that's the deliberative process you're going to use, then the appropriate fine is never going to be imposed on companies that do, in fact, lie. >> well, as to your latter point, the harm to shareholders who may have been victimized by the wrongful conduct is only one

factor amongst eight or nine that we take into account, one of which is the importance of the deterrence impact of the penalty. so i don't want to mislead you to suggest that we only look at whether or not there is harm to shareholders. we look at a variety of factors, including most importantly the deterrent effect of the fine. >> let me ask you this. based on what the judge has said in this case, if you were to start over again, what would be the fine that you would believe would be appropriate for a proxy statement that had a bald-faced lie in it that shareholders relied on or perspective shareholders relied on in terms of purchasing the stock? >> well, actually, congressman, i think actually the judge's concern in his opinion had to do more with whether or not the fine was too high because he felt that it was falling -- the burden was falling on shareholders who were victimized by the whereonful conduct, not

that it was too low. but reasonable minds can have different opinions on that issue. my belief is the settlement we struck was fair and appropriate. >> so in terms of further negotiations, will there be another settlement offered up to the judge or will this go to trial? >> matter is scheduled for trial in early march and the case is proceeding. >> so there will not be any further settlement on this case? >> i couldn't predict the future as to whether or not the case will settle or not. right now it is proceeding in the discovery phase and is scheduled for a march trial. >> well, i would -- i want to understand that could you then go back and negotiate a smaller -- is what you're saying that the judge wants a smaller fine imposed? i find that absolutely unbelievable. >> no, my point was in the judge's opinion he indicated that he was concerned about the penalty because he thought that it was -- it was being imposed on shareholders who were

victimized by the wrongful conduct. >> it was -- his opinion was not based on the fact that the fine was too low? >> i don't remember it -- whether or not he used exactly those terms. but his point was more that the fine was -- sorry to repeat myself -- but the fine was falling on the shareholders who were victimized by the wrongful conduct. >> or maybe his focus was the fine shouldn't be imposed on the executives who misled the shareholders and maybe have it taken out of their salaries? >> he did say -- he did question why no individuals were charged, you're right, but he didn't suggest that the fine should be paid out of the pockets of individual or particular corporate executives. >> the gentlewoman's time has expired. i yield five minutes to the gentleman from ohio, ranking member on the subcommittee. >> thank you. thank you, mr. chairman. mr. khuzami, were you here for

miss bair's testimony and questioning earlier this morning? >> yes, i was. >> so you're aware of what she said and confirming what mr. lewis had told this committee about the meeting took place in october, ten days after t.a.r.p. had passed where the nine biggest financial institution were brought to this town including bank of america, told they were now going to have their bank partially nationalized and had to accept t.a.r.p. money and fine a form. you heard that all that testimony that she gave? >> yes. >> and i guess my point is, my question is, well, let me go back to this. and she -- her testimony to this committee a few hour ago was that that action by the fed, by mr. paulsen, by mr. -- treasury secretary paulsen and federal reserve chairman bernanke, quote, took her breath away, when she saw, you know, what took place at that meeting. so now as we move forward, it

seems to me that, you know, i guess your testimony, i apologize for not being here, i was at another commitment, you talked about shareholders being misled. but it seems to me that this unbelievable involvement by the government, the e-mail we have that has been part of the record in earlier hearings from mr. lacquer, federal reserve bank of richmond, we are talked about the fact they didn't want to discloseable event so mr. paulsen, mr. bernanke were not willing to put anything in writing about the willingness to help bank of america with additional t.a.r.p. dollars. i mean it seems to me that someone will look at this and say, bank of america, what was the government's culpability here in running this show and pushing for this deal, particularly mr. paulsen and mr. bernanke? i mean, i assume you at the s.e.c. are looking at -- that

has to -- in my mind factor into this whole picture this whole scenario that we have been looking at now for several months. any response you have on that? >> congressman, as we look at these events, we look at the roles of all the participants that are relevant and all of the facts. so i guess that would be my response. >> yes or no? would potential arguments by bank of america that the bank and its management were not necessarily completely liable because they were acting at the government's directions. >> well, the events that you're talking about, i believe, occurred after the proxy and so after the merge her been approved and so the question is whether or not with respect to the t.a.r.p. money, whether or not that understanding had become a material contract that had to be disclosed under the

8-k rules and regulations. so that -- that is certainly an issue. >> does the whole -- i mean, let me -- when did you guys first become aware of what was taking place here, the mounting losses at merrill lynch? when did you first become aware of that? >> unfortunately i wasn't there until march so i can't -- i don't know the answer to that question. >> why do you think, when we have the e-mail saying we don't want to discloseable event, why do you think there was a reluctance by the federal reserve to not have information be made known to the s.e.c.? >> i probably won't be appropriate for me to speculate about that. >> okay. mr. chairman, i yield back. >> thank you very much. i now yield to the gentlewoman from california, congresswoman watson. >> thank you, mr. chairman. and thank you for this follow-up hearing.

we have had several in the past and after listening to the testimony from the bank of america, ceo kenneth lewis, the federal reserve chairman ben bernanke, and former treasury secretary hank paulson, and officials at the bank of america, there is still strong questions and i know the intent of this committee through its chair is to get some of the questions answered. so we will know really what took place. and we want to the quality of the bank of america's due diligence process and the motivation behind boa's attempt to claim a material adverse change, and the adequacy of their disclosure to share holders. can you package all that in and clarify that for us? i think this is what the third

or fourth hearing, mr. chairman? >> fifth. >> let us hear how you would describe the roles that each one of these sectors played. >> well, congressman, as volling some or all of the matters currently under information, i have to be careful about my comments with respect to the proxy that was sent out in connection with the merger. as we have charged in our complaint, we believe that the disclosure, we do not believe it was misleading and that bank of america had already had an agreement to pay bonuses when merrill limp was not going to pay such bonuses without their contestant when contestant had already been given.

that's what's proceeding. >> let me stop you, and i want to queery these bonuses ethically. i don't see how the bonuses could even be in contention when we are bailing out two big -- too-big-to-fail institutions with taxpayers' money to try to capitalize these institutions so they could save people's homes, etc, etc. it's a bonus under a crisis condition that exists. i just want you to talk about bonuses and then continue. i just want you to talk about bonuses and then continue. >> well, congressman, again, from an enforcement perspective, my focus is on what the law requires and whether or not the law has been violated. >> well, do bonuses fall under that provision in the law?

>> generally not. >> okay. >> except in this situation where they made a representation about what they were going to do about bonuses and that representation in our view was false. >> that was prior to the collapse, wasn't it? >> that was -- >> when people signed their contracts, as i understand, they had bonuses attached in there. but the whole condition has changed now where they have to comply with the provisions that were in the original agreement. >> well that's correct. the bonuses that were paid in this case were paid frankly shortly after the merger was approved. that's correct. >> would you continue on, please? >> well, probably not much more -- i don't mean to disappoint you, but probably not much more i would say on that topic. whether or not, you know, bonuses are appropriate and the appropriate level and the balancing between incentivizing talents and retaining talent

versus what is an appropriate compensation is probably something that is above my pay grade. >> i've heard that, say, to retain talent, that really goes beyond, you know -- i feel it is so absurd. i don't think, at this point, that you couldn't find a thousand -- or you could find a thousand people out there with tremendous talent. if that talent goes, there are people lined up. we are really being hit hard. i'm talking about my district now, which is los angeles, culver city, hollywood, people have lost their jobs in droves, lost their investments. talent is available, believe me. and so it is a phony, phony excuse. but in putting this all together, i feel there were tremendous failures on all sides. would you agree to that? >> i think there is a lot of -- there is a lot of blame to go

around. >> yeah. and my colleague, miss speier, said it was just downright lies that were given, and possibly it was done so that government could support b of a and give them more support in the merger. i'm really thoroughly disappointed that the people who were in place, particularly at the s.e.c. looked the other way. thank you. i yield back, mr. chairman. >> thank you very much. the gentlewoman's time expired. i yield five minutes to the gentleman from missouri, congressman clay. >> thank you very much, mr. chairman. and thank you, mr. khuzami, for being here. let me -- just a couple of questions. at what point should action have been taken to curb some of the activities of the big banks' involvement in the securities market. there had to be some indication

to the s.e.c. that some investment houses were stretched too thin without the proper reserves that come at a risk in this market. did red flags or alarms ever go off? what did you know and when did you know it? >> well, congressman, i didn't arrive at the s.e.c. until march of this year. so that's probably not the right person to ask that question of. >> how about the people that you work with now that have been there for years, did red flags go off for them? >> well, you know there was certainly systemic risks and a bubble that had occurred in the housing market and elsewhere that, you know, that resulted in the collapse and the excessive leverage and risk taking that we saw. you know, it is -- what the commission saw at various points

along the way, it is difficult for me to answer that question. we didn't have regulatory authority over certain areas, so it might be better if i have an opportunity to respond to you after today's hearing so i can give you a more full summary. >> i would love to hear from your colleagues in writing just what -- what alarms went off or whether the relationship was too cozy with the big banks, that they never wanted to cite them for risky practices. let me ask you in particular why did bank of america get only a slap on the hand when it was cited in 2006 for improperly marketing auction rate security? why were they allowed to

continue these practices, abusing false and misleading information in selling these instruments? in hindsight, do you think that b of a was given too much leeway? >> congressman, i would have to refamiliarize myself with that case. i'm aware generally of the auction rate securities matters, but as i sit here, not with the particulars of whatever action may have been brought in 2006. i would be happy to respond. >> would you respond to us and to the committee in writing on that issue also? >> certainly. >> okay. mr. chairman, i have no further questions. i yield back. >> thank you very much. before we close out, let me just say, mr. khuzami, i'm troubled by the question that the gentleman from maryland raised, mr. cummings. you know, first in terms of -- it seemed to me that individual

executives, the ones who sign off on the proxy filings should be the ones that are responsible so therefore why wouldn't they be the ones that you go after, you know, you fine them and they -- from the personal standpoint, because, you know, like you said, you know, taking out money, and then paying the fine, and i'm not sure that -- we get to where we need to go with that. the other thing that the general feeling is in terms of the community at large, they feel that the reason the judge sent it back to you is that you were not aggressive enough, that you did not pursue it in a fashion that he felt that it should have been. and, of course, that's the general feeling among people, you know, if they say in the street as to what's going on.

now i don't know whether that's the case or not, but i do believe that you really need to look at that in terms of because when i listen to the fact that they're paying our money, you know, that doesn't encourage, you know, people to do what's right. >> well, a couple of responses. first with respect to the payment of the fine, obviously any entity that receives t.a.r.p. funding or other money still has to pay that full amount back with interest. so whether or not a fine was paid with government money which can be fundable in an institution, but they had to pay back all the money they got from the government with interest, let me make that point. second of all, you're right, the judge expressed concern about not charging individuals. we have shown a very aggressive posture of charging individuals and if you look historically at

our cases, the overwhelming number of cases result in charges against individuals and not corporations alone. and i just mentioned some earlier today. but the particular issue in the proxy area is that the proxy laws impose the obligation on the -- the entity whose proxy is being solicited or on whose behalf it is being solicited. and those are the corporations. to charge individuals, you need a higher level of proof. you need to show what is called sienter, knowledge or reckless conduct, meaning a significant and substantial deviation from normal standards of care. and it is that difference in the legal standard that makes a difference in how we can proceed. there is a higher burden of proof with respect to the individuals and our determination based on the record we had is that, you know, we did not have the basis to

charge those individuals. now as we get into the discovery process, we may get additional information and we'll take that into account and in making our decision. but i don't want to leave the impression that we do not aggressively pursue individuals. we recognize the deterrent impact of charging individuals as much as corporate penalties deter people. nothing substitutes for charging individuals. and we do that across the board in many, many, many of our cases. >> because i'm happy to hear because the shareholders who are really the ones who suffer in a case like this. let me thank you very, very much for your testimony and, of course, we really appreciate the fact that you came in and you're here and you shared with us. this is the end of many hearings we have had on this and we hope that we will now be able to move and give the kind of confidence that people really need in order to turn this situation we now our findselves in around. so i want to thank you again. this hearing is now adjourned. 9

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