WASHINGTON — New York Attorney General Andrew Cuomo, joined by Neil Barofsky, the special inspector general of the Troubled Asset Relief Program, has filed civil charges against Bank of America, its former chief executive officer Kenneth D. Lewis, and its former chief financial officer Joseph L. Price for allegedly duping shareholders and the federal government to facilitate a merger with Merrill Lynch.
The suit, which was filed in the New York Supreme Court, was announced by Cuomo today. Bank of America agreed to pay a $150 million civil penalty and strengthen its corporate governance and disclosure practices to settle Securities and Exchange Commission and North Carolina attorney general charges that it failed to properly disclose employee bonuses and financial losses at Merrill Lynch before shareholders approved the merger of the two companies in December 2008.
The settlements must still be approved by Judge Jed S. Rakoff, who sits in the U.S. District Court for the Southern District of New York in Manhattan and last year rejected a previous proposed settlement between the SEC and the bank.
Bank of America Merrill Lynch was the second-ranked municipal bond underwriter in 2009 by dollar volume, having served as senior manager on 513 issues totaling $55.4 billion. It issued a statement yesterday saying it is pleased to have reached settlements with federal and state regulators.
A Bank of America spokeman said yesterday, “We find it regrettable and are disappointed that the NYAG has chosen to file these charges, which we believe are totally without merit. The evidence demonstrates that Bank of America and its executives, including Ken Lewis and Joe 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.”
Mary Jo White, a partner at Debevoise & Plimpton LLP and former U.S. Attorney for the Southern District of New York who is representing Lewis, said today that Cuomo’s lawsuit is “not fair” and “without factual legal basis.” She pointed out that the SEC decided it was not appropriate to file charges against Lewis or other former bank officials based on the evidence and circumstances.
William Jeffress, Jr., a partner at Baker Botts LLP representing Price made the same point and said, “The attorney general has misrepresented facts; he has selectively referred to facts thought to support his theory, while ignoring facts that contradict his theory; and he has drawn conclusions that a fair-minded regulator could not responsibly draw.”
Cuomo claims in his lawsuit that 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, the bank’s management manipulated the federal government into saving the deal with billions of dollars of taxpayer funds by falsely claiming they would back out of the deal without bailout funds, Cuomo claimed.
“This merger is a classic example of how the actions of our nation’s largest financial institutions led to the near-collapse of our financial system,” Cuomo said. “Bank of America, through its top management, engaged in a concerted effort to deceive shareholders and American taxpayers at large. This was an arrogant scheme hatched by the bank’s top executives who believed they could play by their own set of rules. In the end, they committed an enormous fraud and American taxpayers ended up paying billions for Bank of America’s misdeeds.”
Bank of America announced a plan to buy Merrill Lynch on Sept. 15, 2008, and a shareholder vote was scheduled for Dec. 5, 2008. However, by the day of the shareholder vote, Merrill had incurred actual losses of more than $16 billion, according to Cuomo. Lewis and Price knew about the massive losses but did not disclose them to shareholders, Cuomo said.
He said they also allowed Merrill to pay out $3.5 billion in undisclosed bonuses, despite the losses. Lewis then allegedly misled federal regulators by telling them that the bank could not complete the merger with a bailout. However, by the time Lewis sought the bailout and threatened to terminate the merger agreement without it, Merrill’s actual losses had only increased by another $1.4 billion, Cuomo said. Bank of America received more than $20 billion of federal aid, which it has since repaid.
Under the terms of the settlement with the SEC, the $150 million would be distributed to Bank of America shareholders harmed by the bank’s alleged disclosure violations. The bank also agreed to disgorge $1.00 of ill-gotten gains and pay $1.00 to the North Carolina attorney general for its consumer protection purposes.
The bank also agreed to: retain an independent auditor to perform audits of its internal disclosure controls; have its CEO and CFO certify they have reviewed all annual and proxy statements; retain disclosure counsel who would report to and advise the bank board’s audit committee on disclosures; adopt a “super-independence” standard for all members of the board’s compensation committee, prohibiting them from accepting other compensation from the bank; and maintain a consultant to the compensation committee.
The bank also would provide shareholders with an annual nonbinding “say on pay” with respect to executive compensation, and implement and maintain incentive compensation principles and procedures that are published on its Web site.
Cuomo said yesterday that all of the regulators had been cooperating and that there is a rationale to the lawsuit and settlements. The settlements will allow shareholders to be compensated for harm, he said, while the lawsuit, which will take some time, will pursue wrongdoing.
