New York Attorney General Andrew M. Cuomo has filed a lawsuit against Bank of America, its former CEO Kenneth D. Lewis, and its former CFO Joseph L. Price on charges of duping shareholders and the federal government in order to complete a merger with Merrill Lynch.
The suit claims the bank'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 allegedly 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 Cuomo. "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 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 losses of more than $16 billion.
Bank of America's top management, including CEO Lewis and CFO Price, knew about these massive losses, the suit maintains, and that additional losses were forthcoming. Nonetheless, the bank's management allegedly chose not to disclose this information so that shareholders would approve the merger.
The suit also contends that after shareholders approved the deal, Lewis 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. Between the time that the shareholders had approved the deal and the time that Lewis sought a taxpayer bailout, Merrill's actual losses had 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, according to the suit, the bank knew that such an attempt would likely be futile.
As a result, Bank of America received more than $20 billion in taxpayer aid.
The lawsuit also 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.
The Cuomo lawsuit is not the only legal action filed in connection with the Merrill Lynch merger. Several pension groups have teamed up to file a complaint charging there massive deception regarding the payment of bonuses.
