Whistleblowers Helped SEC Bring $415 Million Settlement Against Bank of America -- Update

By Jenny Strasburg and Dave Michaels

The Securities and Exchange Commission on Monday announced its biggest-ever whistleblower awards, with roughly $83 million combined going to three whistleblowers who helped the regulator reach a $415 million settlement with Bank of America Corp., according to an SEC statement and a lawyer representing the whistleblowers.

That 2016 settlement was the SEC's second-biggest against a Wall Street bank. As part of the agreement, Bank of America resolved accusations that it misused customer cash and securities to generate profits, putting billions of dollars of customer assets at risk over a roughly six-year period.

The SEC, in keeping with its usual practice, didn't specify Monday which settlement the whistleblower awards were connected to. But Jordan Thomas, a partner at Labaton Sucharow LLP who advises corporate whistleblowers, said he represented the three award recipients cited anonymously in the SEC announcement. Two recipients together were awarded roughly $50 million and another about $33 million.

Mr. Thomas confirmed that the whistleblowers provided original information to the SEC that helped the regulator in its investigation.

An SEC spokesman declined to comment.

Bank of America admitted to wrongdoing in agreeing to the 2016 settlement. In a statement at the time, the bank said, "While no customers were harmed and no losses were incurred, our responsibility is to protect customer assets and we have dedicated significant resources to reviewing and enhancing our processes. The issues related to our procedures and controls have been corrected."

A chunk of the settlement covered a series of complex trades conducted from 2009 to 2012 that the SEC said lacked economic purpose and were designed to boost profits by artificially reducing the amount of walled-off deposits Bank of America safeguarded as a cushion in case of financial trouble.

The Wall Street Journal first reported details of those trades and the SEC probe in April 2015. The Journal described billions of dollars of loans structured by the Charlotte, N.C.-based bank's Merrill Lynch unit, and extended to customers recruited specifically to receive the loans. Inside Merrill Lynch, the strategy was dubbed "leveraged conversion." It helped the bank reduce the amount of reserves it segregated in what are known as "lockup" accounts.

Lockup money can be enticing, because rather than idle in reserve, it can be used to generate profits. Securities-law provisions require minimum lockup amounts to protect customers who might need to be paid in an emergency.

Some traders called the math behind the Merrill Lynch trades "fugazi P&L, " or phony profit and loss. Some managers in the bank at times told colleagues that the SEC had signed off on the same trades that ultimately led to a portion of the bank's settlement, the Journal reported in 2015.

The SEC said Monday that the record awards show that whistleblowers can provide "incredibly significant information" that can help the regulator remedy serious violations. The previous record SEC whistleblower award was $30 million, in 2014.

SEC awards since 2012 now total more than $262 million to 53 whistleblowers. The money comes out of monetary sanctions paid to the SEC.

"These courageous executives are a shining example for other people on Wall Street with integrity and are likely to lead to an increase in corporate whistleblowing," Mr. Thomas said Monday of the latest awards.

Write to Jenny Strasburg at jenny.strasburg@wsj.com and Dave Michaels at dave.michaels@wsj.com

(END) Dow Jones Newswires

March 19, 2018 14:54 ET (18:54 GMT)

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