Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, January 13, 2010

SEC Brings New Action Against BofA For Failure to Disclose Merrill Losses

You will recall that on Monday Judge Rakoff refused to allow the SEC to amend its complaint against Bank of America (relating to failures to disclose Merrill bonuses) to add new charges. That case is currently set for trial to begin on March 1, 2010.  Following the Judge's ruling, the agency brought a separate action and charged Bank of America with violating the federal proxy rules by failing to disclose extraordinary financial losses at Merrill Lynch prior to a shareholder vote to approve a merger between the two companies.

The SEC’s complaint, filed in U.S. District Court for the Southern District of New York, alleges that Bank of America learned prior to the Dec. 5, 2008, shareholder vote that Merrill Lynch had incurred a net loss of $4.5 billion in October 2008 and estimated billions of dollars of additional losses in November. Bank of America erroneously and unreasonably concluded that no disclosure concerning these extraordinary losses was required as shareholders were called upon to vote on the proposed merger with Merrill Lynch. The lack of any disclosure about the losses deprived shareholders of up-to-date information that was essential to their ability fairly to evaluate whether to approve the merger on the terms presented to them. Bank of America’s failure to disclose this information violated its undertaking to update shareholders concerning fundamental changes to previously disclosed information, and rendered its prior disclosures materially false and misleading.

According to the SEC’s complaint filed today, the actual and estimated losses at Merrill Lynch for the fourth quarter of 2008 together represented approximately one-third of the value of the merger at the time of the shareholder vote and more than 60 percent of the aggregate losses that the firm sustained in the preceding three quarters combined. The SEC’s complaint further alleges that Merrill’s deteriorating performance represented a fundamental change to the financial information that Bank of America provided shareholders in the proxy statement used to solicit votes for approval of the merger. In connection with the merger, Bank of America also publicly filed a registration statement in which it represented that it would update shareholders about any fundamental changes in the information previously disclosed.

The SEC’s complaint charges Bank of America with violating Section 14(a) of the Securities Exchange Act of 1934 and SEC Rule 14a-9 by failing to make any disclosure to its shareholders of the losses that Merrill Lynch incurred in the two-month period leading to the Dec. 5, 2008 shareholder vote.

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