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Bank of America judge bars testimony of news reports

Bank of America Corp. suffered a setback in its defense to civil charges that it misled investors after a judge ruled that it may not introduce at a trial testimony about media reports predicting it would pay bonuses.

The U.S. Securities and Exchange Commission sued the Charlotte, N.C.-based lender on Aug. 3 claiming it misled investors about bonus payments while buying Merrill Lynch & Co. Bank of America said in a November 2008 proxy statement that Merrill agreed not to pay year-end bonuses when the bank had already agreed to Merrill’s paying as much as $5.8 billion, the SEC claims. A trial is scheduled for March in New York.

As part of its defense, Bank of America has argued that shareholders already knew, as a result of media reports, that Merrill would likely pay billions of dollars in bonuses. U.S. District Judge Jed Rakoff in Manhattan on Monday barred the bank from offering testimony about such reports because the proxy statement itself told shareholders to ignore them.

“In effect, the bank is arguing that, even though it expressly warned its shareholders to disregard the media, it can now defend itself by asserting that a reasonable shareholder would have disregarded these warnings and, by consulting the media, perceived that the bank’s alleged lies were immaterial,” Rakoff wrote in a six-page opinion. “Even a zealous advocate might perceive that such an argument hints at hypocrisy.”

Larry Di Rita, a spokesman for Bank of America, said in an e-mailed statement that the bank is “evaluating our options and possible next steps.” John Heine, an SEC spokesman, declined to comment.

The SEC asked Rakoff to exclude testimony from expert witnesses whom Bank of America plans to call. The bank’s experts include Joseph Grundfest of Stanford Law School and R. Glenn Hubbard of Columbia Business School, who are to testify about materiality of statements in public filings; William Holder of the University of Southern California Business School, who is to testify about accounting issues; and lawyer Morton Pierce on disclosure practices. Another bank expert will testify about executive compensation, Rakoff said.

The SEC has one expert witness, Robert Daines of Stanford Law School, who is to testify about the materiality of the allegedly concealed information.

In his ruling, Rakoff said the SEC wants to exclude most or all of the bank’s experts. The judge said that at that this point he’d decide only the issue about media reports.

“The fact that the media were predicting, as the bank claims, that Merrill would in fact pay bonuses is entirely irrelevant to any aspect of this issue, for the alleged falsehood consisted of representing as a contingency what was in fact an agreement already reached,” Rakoff wrote.

The case is Securities and Exchange Commission v. Bank of America Corp., 09-cv-06829, U.S. District Court, Southern District of New York (Manhattan).