Posted on 05 Feb 2010
New York Attorney General Andrew Cuomo filed civil securities fraud charges against former Bank of America CEO Kenneth Lewis and former Chief Financial Officer Joseph Price, alleging they decided not to disclose mounting losses at Merrill Lynch & Co. before getting shareholder approval to acquire the Wall Street firm.
Separately, the bank and the Securities and Exchange Commission reached a $150 million settlement on allegations of misleading investors during the Merrill deal. The settlement requires a judge's approval.
Shareholders approved the purchase on Dec. 5, 2008, not knowing that Merrill had accumulated more than $16 billion in "actual losses" for the fourth quarter of 2008, according to the attorney general. The bank didn't say anything about the mounting losses until the U.S. in January 2009 provided the bank with an additional $20 billion to absorb Merrill.
"We believe bank management understated the Merrill Lynch losses to shareholders to get shareholders to approve the deal then overstated their ability to terminate the agreement to get $20 billion from federal government," Mr. Cuomo said on a conference call.
After the shareholder vote, Bank of America executives went to U.S. officials and said they might back away from the purchase because the losses were greater than they expected. But Mr. Cuomo said Wednesday that "actual losses" were only $1.4 billion greater than at the time of the vote.
"That is just a fraud," he said.
The bank, in a statement on Wednesday, called the charges "regrettable" and disappointing and said it would vigorously defend against them. The bank and Messrs. Lewis and Price "at all times acted in good faith and consistent with their legal and fiduciary obligations."
"In fact, the SEC had access to the same evidence as the NYAG and concluded that there was no basis to enter either a charge of fraud or to charge individuals. The company and these executives will vigorously defend ourselves," the bank said.
Bank officials have maintained that they followed the advice of counsel in deciding whether to disclose losses prior to the vote, and that pre-vote losses weren't high enough to reveal. The loss projections accelerated in the week after the vote and that is what caused the bank to consider withdrawing from the purchase, officials have said.
Mr. Lewis was CEO during the talks with the government; he left the bank at the end of 2009. Mr. Price, who was CFO during the talks, recently moved to become president of the bank's consumer operations.
Mary Jo White, Mr. Lewis's attorney, said in a statement that Mr.'s Cuomo's decision to sue was "a badly misguided decision without support in the facts or the law." Lawyers for Mr. Price said the attorney general's allegations were "flatly contrary to the evidence."
Mr. Cuomo said bank executives "exploited" the economic fear that existed in late 2008 and "defrauded" taxpayers at a "very difficult and sensitive time."
The deal between the bank and the Securities and Exchange Commission requires federal Judge Jed S. Rakoff's approval. Last year, Judge Rakoff rejected a settlement offer that required the bank to pay $33 million in penalties. He said it was "unjust" and questioned why no individuals were held accountable. He set a trial date for March 1.
The SEC earlier this year filed additional charges against Bank of America for failing to disclose Merrill's mounting losses ahead of its shareholder vote on the takeover.
The proposed pact would resolve both allegations. To win approval, the SEC submitted lengthy filings to the judge in support of the deal.
In addition to the fine, Bank of America agreed to install numerous corporate-governance measures, including retaining an independent auditor to review its internal disclosure controls, requiring its chief executive officer and chief financial officer to certify that they reviewed proxy statements, and providing shareholders with a nonbinding vote on compensation.
Bank of America agreed to the remedial terms for a three-year period.
The deal would also require the bank to have a "super-independence" standard for all members of the bank's compensation committee, under which they would receive no other pay from the bank. The bank would also be required to have a "super-independent" compensation consultant for the committee.