Source: NY Attorney General
Attorney General Andrew M. Cuomo, joined by Special Inspector General for the Troubled Asset Relief Program Neil Barofsky, today announced a lawsuit against Bank of America, its former CEO Kenneth D. Lewis, and its former CFO Joseph L. Price for duping shareholders and the federal government in order to complete a merger with Merrill Lynch. According to the lawsuit, 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.
"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 Attorney General Cuomo. "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."
"The events surrounding the Bank of America/Merrill Lynch merger and the United States Government's investment in Bank of America through the Troubled Asset Relief Program are an important part of the history of the financial crisis," said Special Inspector General Neil Barofsky. "Attorney General Cuomo and his staff, working hand in hand with the law enforcement agents of SIGTARP, quickly identified the important shareholder and taxpayer interests at stake in the disclosures surrounding the merger and meticulously pieced together the evidence that supports the historic charges filed today. The close partnership between the New York Attorney General's Office and SIGTARP in this case stands as a tremendous example of how well the public's interests can be served through effective State and Federal coordination, and should send a powerful message that we will work tirelessly to hold accountable those who have engaged in misconduct relating to the response to this National crisis."
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. 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 fhe fte 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.
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.
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.
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.
The Attorney General thanked Special Inspector General for the Troubled Asset Relief Program Neil Barofsky and his staff for their partnership and hard work throughout the investigation. The Attorney General also thanked the Securities and Exchange Commission ("SEC") and noted that today the SEC is announcing a proposed corporate settlement with Bank of America (See SEC Lit. Release #21407). Cuomo stated, "I support the SEC's proposed settlement of its pending actions against Bank of America. The corporate governance provisions of that settlement are important reforms for Bank of America and ensure that safeguards against future violation of the law will be implemented immediately and will not have to await the conclusion of the case we are filing today."
The investigation was conducted by Assistant Attorneys General Vicki Andreadis, Thomas Teige Carroll, Pamela Lynam Mahon, Christopher Mulvihill, and Ethan Zlotchew, under the supervision of Special Deputy Attorney General for Investor Protection David A. Markowitz.