Bank Of America Accused Of Hiding Merrill Lynch Losses From Shareholders Before Acquisition

Papers filed in private shareholder litigation accuse top executives at Bank of America Corp of misleading holders of shares and call options about mounting losses and bonus pay outs  just prior to a 2008 vote on its purchase of Merrill Lynch & Co.

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

Lewis also said the bank’s law firm and chief financial officer advised him that no disclosure was necessary.

“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.”

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

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.

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.

The losses caused Bank of America to get a second, $20 billion taxpayer bailout, as their share price dropped 93 percent. The share price remains close to 80 percent below its level prior to the merger.

When Bank of America agreed to buy Merrill on Sept. 15, 2008, the same day Lehman Brothers Holdings Inc went bankrupt, it expected the purchase would dilute earnings by 3 percent 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 percent dilutive in 2009 and 2.8 percent 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 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.

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

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