Suit: BofA underplayed Merrill Lynch?losses

Bebeto Matthews / AP

In this Sept. 15, 2008 file photo, Bank of America Chairman and CEO Ken Lewis is shown listening during a news conference in New York.

By Martha C. White

Bank of America's top brass knew more about Merrill Lynch's weak financial condition than it disclosed to shareholders?when they voted to acquire the?financial management firm at the peak of the 2008 financial crisis, a shareholder lawsuit has claimed.

In a deposition cited in the lawsuit, filed Sunday, former CEO Kenneth Lewis acknowledged that executives uncovered much deeper problems in Merrill's finances after regulatory documents had been filed regarding the acquisition, which BofA said at the time would not affect its long-term?profitability.

Shareholders voted on the deal based on the figures in those proxy filings, which the suit claims included?"materially false" statements that the acquisition would?not significantly dilute BofA's earnings.

The lawsuit charged that the bank had an obligation to tell shareholders that, instead of incurring a 3 percent hit to earnings in 2009 and potentially adding to BofA's profit the following year, acquiring Merrill would actually cost the bank more than 13 percent in 2009 and nearly 3 percent more in 2010.?

The suit named Lewis along with those board members who recommended that shareholders vote in favor of the acquisition. In a December 5, 2008 shareholder meeting prior to the vote, Lewis referred a shareholder with a question about Merrill's financial impact on the bank to the proxy documents, even though he knew the reality was much grimmer than the figures contained there claimed.?

According to a Reuters report, Lewis said he believed disclosure was unnecessary, based on the advice he was given by the bank's CFO and its law firm.

The suit said by the time of the meeting, top bank executives expected Merrill Lynch to lose some $14 billion before taxes in that quarter alone. Straits were so dire that BofA required the ailing company to liquidate "hundreds of billions of dollars of assets" in an attempt to shore up its finances.?In internal correspondence cited by plaintiffs, BofA's counsel warned that this action "stands to reduce the overall earnings potential of MER for years to come.?

Shareholders had no idea things were so bad when they cast their votes, the suit said.?

Plaintiffs argued that these expectations of huge losses comprised material information that should have been disclosed, and that the bank couldn't say otherwise. The suit pointed to the proxy filings, which referred to the assertion that Merrill would cost the bank a mere 3 percent in 2009 and be roughly breakeven in 2010 as a??material factor? for shareholders to consider.?

In its own court filing, Bank of America said plaintiff's argument was moot because while the company was directly injured by the drop in its stock price, shareholders were only indirectly affected, and that "damages from the impairment of the right to vote are not the same as damages from paying too much for a company."

When bank executives had second thoughts and contacted the Federal Reserve and Treasury to try to undo the acquisition, "Federal officials were staggered by the size of Merrill?s fourth quarter losses," the suit said, adding that Lewis suggested the bank might require a guarantee of a government bailout as an incentive to complete the merger.?

Ultimately, Bank of America received a $138 billion bailout in early 2009. "The U.S. will invest $20 billion in Bank of America and guarantee $118 billion of assets," the Treasury, Federal Reserve and FDIC said in a statement on January 15 of that year. Following the announcement, BofA shares plummeted, precipitating a $50 billion loss in shareholder value, the lawsuit charged.??

"There is nothing new here. It was clear that Merrill Lynch's deteriorating financial condition was widely appreciated by shareholders before voting for approval," Bank of America spokesman?Lawrence Grayson said. "Most importantly, Merrill has performed extremely well on behalf of Bank of America for shareholders" since then, he said.

black panther party frank martin pink slime eagle cam us soccer trayvon martin case affordable care act