New York sues Bank of America over Merrill Lynch merger

Bank of America is not out of the woods yet.

No sooner did America's biggest bank announce a proposed settlement with the Securities and Exchange Commission (SEC) over the Merrill Lynch merger than New York's attorney general filed civil charges against B of A and its former CEO, Ken Lewis, alleging they misled investors.

Both cases revolve around the bank’s purchase of Merrill Lynch in September 2008. At issue is whether Bank of America and its officers intentionally failed to disclose $16 billion in mortgage-related losses at Merrill prior to a shareholder vote on the merger. After shareholders approved the takeover, Bank of America then turned to the US government to help it weather the financial storm.

Although Bank of America has reached an agreement with the SEC, it still has to satisfy federal Judge Jed Rakoff of the Southern District of New York. The judge has already told the SEC once, last fall, that he was not satisfied with its proposed settlement.

“If anyone thinks merely reaching an accord is enough to satisfy the judge, they are dead wrong,” says Anthony Sabino, a professor of law and business at St. John’s University in New York. “This judge is one of the top three judges who knows US securities law.”

Try, try again

Last fall Judge Rakoff rejected a settlement of $33 million and asked whether charges against individuals might be appropriate. In the latest settlement with the SEC, Bank of America agreed to pay a $150 million civil penalty to be distributed to shareholders at a later date. The bank also agreed to pay one dollar in disgorgement for ill-gotten gains.

Some legal observers suggest that the $150 million penalty might actually cause problems in Rakoff’s court.

“He will go ballistic,” predicts James Cohen, a law professor at Fordham University in New York. “He will wonder how consistent that [payment] is with the government’s decision [that] nobody [at the bank] did anything wrong.”

In announcing its settlement Thursday with the SEC, the bank said, “the SEC staff has determined that no one acted with any intent to mislead and that charges against individuals for their roles in connection with proxy disclosure are not appropriate.”

In addition, Bank of America agreed to a range of seven other actions ranging from hiring an independent auditor to attest to the bank’s disclosure controls and procedures, to providing shareholders with an annual “say on pay” regarding compensation for executives. The bank has agreed to abide by the requirements for three years.

If Rakoff rejects the settlement, the case is scheduled for trial on March 1.

New York bares its teeth

No matter what happens with Rakoff, the bank will also have to deal with New York Attorney General Andrew Cuomo. Mr. Cuomo is joined in the suit, announced Thursday, by Neil Barofsky, special inspector general for the federal Troubled Asset Relief Program (TARP).

Mr. Cohen notes that the bank, in its settlement with the SEC, maintains it did nothing wrong. “It will be interesting to see if Rakoff agrees with this,” he says. “I think he will say, 'You did wrong and you must admit it,' and that runs right into Cuomo’s suit.”

According to Cuomo's complaint, Bank of America concealed the losses at Merrill Lynch from shareholders, so that they would approve the merger. His civil suit alleges that the bank also failed to inform shareholders it was allowing Merrill Lynch, having its worst year ever, to pay $3.57 billion in employee bonuses. Then, after the shareholders approved the takeover, Cuomo alleges, CEO Lewis “misled” federal regulators by telling them the bank could not complete the merger without government help.

After Lewis appealed to regulators, the bank received $20 billion in TARP funds. It has since repaid that money.

“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,” said Cuomo in a statement. He accused Bank of America of “arrogance” and of committing “enormous fraud.”

Bank of America did not return a call from the Monitor. A spokesman told the Associated Press that the bank believes the charges filed by the state of New York to be "totally without merit."

Noted bank spokesman Robert Stickler, "The SEC had access to the same evidence as the [New York attorney general] and concluded that there was no basis to enter either a charge of fraud or to charge individuals.”

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