M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Thursday, February 4, 2010

AG goes after BAC for securities fraud

"I didn't want to be talking [about ML's] losses through a glass wall over a telephone." BAC Treasurer to CFO Joe Price. 

No surprise then that the Attorney General's office in NY yesterday announced a civil suit under the Martin Act against Ken Lewis and Joe Price for securities fraud in connection with Bank of America's acquisition of Merrill Lynch at the height of last year's financial panic.  The AG's complaint is here

The basics of the complaint are that first, Ken Lewis allowed BAC shareholders to vote on the transaction, while he not disclosing that ML had incurred losses of more than $16 billion.  The AG believes that when BAC management decided not to disclose these losses to shareholders that they withheld material information.  I guess that charge was to be expected.  I mean, even ML's auditors apparently thought disclosure was warranted.  Deloitte told ML:
given the losses through what it looks like will be November when it closes, given the fact that you have another couple of billion of dollars coming down the road in goodwill impairment, we believe it’s prudent that you might want to consider filing an 8K to let the shareholders, who are voting on this transaction, know about the size of the losses to date.

“[the losses] were sizable enough [to] probably warrant disclosure. They were material subsequent events to what occurred at the end of September that would be relevant for parties that were voting …
OK, I get that argument.  Big losses, material losses have to disclosed to shareholders before they vote.  To their credit, it looks like Wachtell got cut out of the decision-making on this.  

The AG's charge that BAC used a threat to invoke the MAC misled federal regulators in order to receive $20 billion more in taxpayer funds is a little harder to make, I think.  I mean is the essence of the argument that when a party threatens to invoke a MAC to force a renegotiation that they are potentially committing securities fraud?  I suppose the essence of the AG's argument is that if ML's losses weren't material enough to disclose to BAC shareholders then they weren't material enough to support a good faith threat to invoke a MAC.  Lewis says apparently that the losses at ML really took off only after the Dec. 5 shareholder vote.  The AG argues that losses only increased by about $1.4 billion.  Hmm, I don't know.  Sounds like a jury question.



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