Bank of America Accused of Hiding Bad News on Merrill Before Buyout

Ken LewisBy Jonathan Stempel

Top executives at Bank of America (BAC) did not tell shareholders just prior to a 2008 vote on its purchase of Merrill Lynch & Co that losses were mounting and expected to weigh down earnings for years, papers filed in private shareholder litigation show.

But the bank and former Chief Executive Kenneth Lewis said in their own court papers that they should not be liable to shareholders who claimed to have lacked information they needed to vote on the once $50 billion merger.

Lewis also said he had been advised by the bank's law firm and chief financial officer that no disclosure was necessary.

The papers, including sworn testimony from Lewis, were filed on Sunday night in class-action litigation accusing the second-largest U.S. bank of fraudulently misleading holders of shares and call options about Merrill's losses and bonus payouts.

They may also strengthen the contention that Bank of America withheld material information just prior to the Dec. 5, 2008 merger vote, a characterization that Lewis resisted in a March 27 deposition by the shareholders' lawyers.

"In all cases of securities fraud, the fight is always about who knew what, when," said Hillary Sale, a law and business professor at Washington University in St. Louis School of Law. "This deposition shows that before the actual shareholder vote, there was knowledge that the numbers were different. Call it large, call it substantial, but it is likely material."

The New York Times earlier reported some of the court papers, which were filed with the federal court in Manhattan.

Other defendants are former Chief Financial Officer Joe Price; former Merrill Chief Executive John Thain, and outside Bank of America directors. A trial before U.S. District Judge Kevin Castel is scheduled for Oct. 22.

Andrew Ceresney, a lawyer for Lewis, declined to comment. Court papers said his client relied on Price and the law firm Wachtell, Lipton, Rosen & Katz as to how much to disclose.

Bank of America spokesman Lawrence Di Rita declined to comment. The bank in court papers said shareholders failed to show damages as a result of "any alleged impairment to voting rights." It also said that to the extent it overpaid for Merrill, it is Bank of America that can assert that claim.

Lawyers for Price, Thain and the outside directors, as well as Wachtell, did not respond to requests for comment. Steven Singer, a lawyer for the shareholders, declined to comment.

Merrill's fourth-quarter loss at the time of the vote was expected to be $9 billion, according to court papers, and ultimately reached $15.84 billion.

It forced Charlotte, North Carolina-based Bank of America to get a second, $20 billion taxpayer bailout, and fueled a 93% drop in its share price over six months. The share price remains close to 80% below its level prior to the merger.

Large, But Material?

When Bank of America agreed to buy Merrill on Sept. 15, 2008, the same day Lehman Brothers Holdings went bankrupt, it expected the purchase would dilute earnings by 3% in 2009, and be "break even" or slightly better in 2010.

According to court papers, Lewis echoed this forecast at the Dec. 5 shareholder vote. But Lewis testified in the deposition that by this time, the bank believed that the merger would be 13.1% dilutive in 2009 and 2.8% in 2010.

"That's a significant change in the dilution and accretion analysis; you would agree with that?" he was asked.

"Yes," Lewis responded.

The bank's former treasurer Jeffrey Brown testified that Merrill's shrinking of its balance sheet, under Bank of America's orders, could reduce the combined companies' annual earnings power by $1 billion before taxes, court papers show.

Lewis appeared to resist the thought that the projected $9 billion Merrill loss had a "material" impact on that company's capital and tangible common equity, which had been $26 billion.

"I would say -- I mean, there was an effect," Lewis said.

"You would agree with me that is a substantial amount?"

"I would say that's a large amount, yes."

In a filing, Lewis maintained that he knew of "no red flags" for him to reject the "considered judgment" of Price and the lawyers about disclosing Merrill's fourth-quarter performance.

Shareholders, however, said Lewis' sworn statements "leave no genuine dispute" that his statement at the Dec. 5 meeting regarding dilution was "materially false" at the time.

"Reliance on a lawyer's advice is an interesting argument," Sale said. "It could give you a defense that you did not intend to mislead, and therefore did not commit fraud. That causes a problem for Wachtell. It could admit it gave that advice, but that raises a specter of malpractice. It's pretty messy."

Merrill has more recently aided Bank of America's results, offsetting losses from mortgages and other litigation.

In 2010, U.S. District Judge Jed Rakoff approved the bank's $150 million settlement over Merrill with the Securities and Exchange Commission, which included no admission of wrongdoing.

Bank of America, Lewis and Price also face a civil fraud lawsuit by New York Attorney General Eric Schneiderman, under a state law that does not require proof of intent. Schneiderman's office did not immediately respond to a request for comment.

Lewis retired at the end of 2009 and was replaced by Brian Moynihan, who remains chief executive. Thain is now chief executive of the business lender CIT Group Inc.

Bank of America shares traded Monday afternoon down 14 cents at $6.88. They traded at $33.74 when the merger was announced.

The case is In re: Bank of America Corp Securities, Derivative, and Employee Retirement Income Security Act (ERISA) Litigation, U.S. District Court, Southern District of New York, No. 09-md-02058.

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Sophie Clarke

I know someone who worked at ML, they were hiding a 600 million loss for years so this was already known by BOA + ML. Michael in answer to your first few sentences - the only reason the government made them do it is because ML was complicit in this whole 911 scam. brokers they dealt with (notably including all the paperwork....)were in the twin towers at the time they came down.. so there is a massive cover up. The large bank firms are in my eyes complicit in insider trading (and murder) at the time of collapse in order to hide trade evidence not to mention their fraudulent and non-consenting use of peoples homes for their credit default swap operations in the prime brokerage markets. The whole merger is nothing more than ML hiding its tracks.....their subsequent loss was also hoovered up by taxpayer dollars....nice work but their game is up with this comment. This article is their song and dance about it to cover the tracks of what really happened. No doubt the fines levied (if any) will also come from the poor....

Remember mergers are not always what they seem.....if your bank has merged over the crisis period then be sure to find out exactly why....

Others I have spoken to have come to the conclusion that people working in the country called "The Corporation of the City of London" really have no idea what they are supporting...

July 17 2014 at 9:35 AM Report abuse rate up rate down Reply

My recollection is that BofA tried to back-out of the deal to purchase Merrill but that the US gov't forced them to go threw with the deal because of the gov;t's fear of a financial collapse if Merrill went under, which it would have. Now BofA is being sued by other government agencies. What a free country!

June 05 2012 at 10:09 AM Report abuse +1 rate up rate down Reply

In a society built on the premise of competition, and additionally, in a country with antitrust and monopoly laws....., well....don't you see the exact opposite prevailing with absolute consolidation of competitors? Perhaps consolidation is not the correct word. Does annihilation fit the bill?

June 05 2012 at 9:57 AM Report abuse rate up rate down Reply

Wrongdoing by BofA? Why, NEVER, I say NEVER! Hugs banks are always truthful, honest, caring and forthright. Just ask the gOP...

June 05 2012 at 9:40 AM Report abuse -1 rate up rate down Reply

You mean my Bank is lying to me? say it isn't so.

June 05 2012 at 5:42 AM Report abuse rate up rate down Reply
Richard Johnson

Investors Hangout is an all free stock message board website with over 19000 stock boards fully equipped with a chart and stock quotes for the NYSE, NASDAQ, AMEX, and OTC BB & PINKS.

June 05 2012 at 3:05 AM Report abuse rate up rate down Reply

So, in simpler terms: Lewis said he had been told by the bank's lawyers and CFO that he didn't have to say a word before he hosed the stockholders? That's nice.

June 05 2012 at 2:17 AM Report abuse rate up rate down Reply

Begs the question when will Congress and/or the Senate finally hold these banks responsible for their fraudulent practices? Given that it appears their palms are being greased by the special interest lobbies that work for these banking/lending institutions, probably never. Get rid of all incumbent senators and congressmen/women and replace them with those who will uphold their oath of office honorably and honestly.

June 05 2012 at 1:52 AM Report abuse +1 rate up rate down Reply

BOA should not OWN Merrill, period. Prudential should NOT own Bache, Halsey Stuart. Nor should banks or insurance companies be reunning high risk trading desks with money that isn't theirs, however, because of waves of mindless deregulation, for several decades, promoted mostly be neo-con's who claim that banking regulations and trading regulations stiffle profits (which is a proven bold face lie) what BOA and others are doing, may be reckless, and immoral, it isn't illegal. You want to see these crooks go to jail? Then it is time to reinforce the laws that protected depositors, policy hollders, and individuals from the illegal monopolies that robe them LEGALLY. Start by voting against any politician who claims that there are too many regulations!

June 05 2012 at 1:35 AM Report abuse rate up rate down Reply

Hang E'm High!!!

June 04 2012 at 11:55 PM Report abuse rate up rate down Reply