‘Sue The Bank’ Week Continues: Cuomo Charges Bank Of America With Fraud

Bank of America, its former CEO Kenneth D. Lewis, and its former CFO Joseph L. Price have been charged with duping shareholders and the federal government to complete a merger with Merrill Lynch. According to a lawsuit filed today by N.Y. Attorney General Andrew Cuomo, 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, the government alleges.

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, by the day of the shareholder vote, Merrill had incurred disastrous actual losses of more than $16 billion. According to Cuomo, 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, Cuomo alleges.
Cuomo also contends that: 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.
Moreover, according to the complaint, as a result of their efforts, Bank of America received more than $20 billion in taxpayer aid. The bank’s management cannot explain why they did not disclose Merrill’s massive losses to shareholders even though the merger with Merrill would have threatened the bank’s very existence if there had been no taxpayer bailout.
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.
According to Cuomo: 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.
A copy of the lawsuit can be found at: www.ag.ny.gov/media_center/2010/feb/BoA_Complaint.pdf.