SEC preparing a case against BAC for structured notes

According to a report in The Wall Street Journal, the SEC is getting a civil enforcement case ready against Merrill Lynch, the wealth-management arm of Bank of America (NYSE: BAC), because of regulatory violations in structured notes the bank sold to investors in 2010. The value of the notes fell as much as 95 percent. The manner in which the notes were marketed by the bank was highly problematic with the risks and the costs not being clearly explained.

Two brokers who worked for the bank's brokerage arm began recording conversations with executives in secret, because some of the investors were complaining about how far the value of the notes had fallen. The two later left Merrill and went to UBS (NYSE: UBS) before filing a federal whistle blower complaint against Merrill Lynch. Notes people purchased for $10 matured in November at a value of 50 cents.

BAC reaches a settlement agreement for other regulatory violations

Bank of America also reached a settlement agreement with the Securities and Exchange Commission on June 23. Through the agreement, the bank will pay $415 million over allegations that it misused customer funds in order to generate profits, essentially using its customers' money as interest-free loans to itself. The SEC did not reveal whether or not that case resulted from whistle blowers, however.

Recent results and comparison with peers

Bank of America's weighted average cost of capital stands at 5.4 percent, while its return on invested capital is 4.5 percent. This means that the bank's returns are lower than its costs. The bank has a dividend yield that is 1.5 percent. By comparison, Morgan Stanley's dividend yield is 2.3 percent.

Conclusion: Steer Clear

Bank of America continues to have one problem after another and can't seem to get its act together. It still struggles with cleaning up messes from years ago. It has problems with efficiency, and we do not see clear signs of improvement.

Morgan Stanley (NYSE: MS) provides a better dividend yield for its investors than does BAC - just one of many alternative financial institutions that investors could cheer. We continue to recommend against investing in Bank of America; despite a relatively low price for the past twelve months, we do not see solid value.