Securities Law Prof Blog

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

Thursday, February 4, 2010

New York Sues BofA over Nondisclosure of Merrill Losses

New York AG Attorney General, who was joined by Special Inspector General for the Troubled Asset Relief Program Neil Barofsky, today announced a lawsuit against Bank of America, its former CEO Kenneth D. Lewis, and its former CFO Joseph L. Price for duping shareholders and the federal government in order to complete a merger with Merrill Lynch. According to the complaint, Bank of America’s management intentionally failed to disclose massive losses at Merrill so that shareholders would vote to approve the merger. Once the deal was approved, Bank of America’s management manipulated the federal government into saving the deal with billions in taxpayer funds by falsely claiming that they would back out of the deal without bailout funds.

Bank of America announced its plan to buy Merrill Lynch on September 15, 2008 and a shareholder vote to approve the transaction was scheduled for December 5, 2008. However, according to the complaint, by the day of the shareholder vote, Merrill had incurred disastrous actual losses of more than $16 billion. Bank of America’s top management, including CEO Lewis and CFO Price, knew about these massive losses and that additional losses were forthcoming. Despite the fact that this information would be important to shareholders, the bank’s management chose not to disclose this information so that shareholders would approve the merger.

After shareholders approved the deal, Lewis then misled federal regulators by telling them that the bank could not complete the merger without an extraordinary taxpayer bailout due to accelerated losses from Merrill. However, between the time that the shareholders had approved the deal and the time that Lewis sought a taxpayer bailout, Merrill’s actual losses had only increased by another $1.4 billion. The bank also threatened federal officials that they would terminate the merger agreement based on a material adverse change in Merrill’s financial condition, even though the bank knew that such an attempt would likely be futile.

As a result of their efforts, Bank of America received more than $20 billion in taxpayer aid.

Furthermore, the lawsuit alleges the following:

  • Shortly before the shareholder vote, Price ignored a warning from the bank’s Corporate Treasurer, Jeffrey Brown, who told Price that, “I didn’t want to be talking [about Merrill’s losses] through a glass wall over a telephone.”
  • The bank’s management failed to tell shareholders that it was allowing Merrill to pay $3.57 billion in bonuses. The amount, criteria, and timing of the bonus payments were omitted from the proxy. The bonuses were distributed in a manner that was completely inconsistent with Merrill’s prior practice, and in the worst year in Merrill’s history.
  • The bank’s management did not tell the bank’s lawyers about the full extent of Merrill’s losses before the shareholder vote. For example, the bank’s former General Counsel, Timothy Mayopoulos, was intentionally mislead about the size and nature of Merrill’s losses. After the shareholder vote, when Mayopoulos learned of the actual losses, he attempted to confront Price but was summarily terminated.
  • In the course of the Attorney General’s investigation, Lewis and other executives misled investigators about their conduct during and after the shareholder vote.
  • In the process of acquiring Merrill Lynch, Bank of America’s management intentionally misled its shareholders, its Board of Directors, its lawyers, and United States taxpayers.

The lawsuit filed today in New York State Supreme Court seeks monetary relief and injunctions from Bank of America, Lewis, and Price.

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