Securities Law Prof Blog

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

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Tuesday, January 19, 2010

SEC Charges BofA with Failure to Disclose Merrill's Losses

Here is the complaint the SEC filed against the Bank of America, charging that the company failed to disclose Merrill Lynch's fourth quarter losses in its proxy solicitation seeking approval for the merger.  You will recall the Judge Rakoff refused to allow the agency to amend its complaint to add this count, but said it could bring a separate action, which it has now done.  The trial in the first action, dealing with the failure to disclose the Merrill Lynch bonuses, is scheduled to begin March 1.

According to the SEC’s complaint, filed in U.S. District Court for the Southern District of New York, 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, 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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