Highlights from the suit:
By early December 2008, Bank of America’s top management, including its CEO Ken Lewis and CFO Joseph Price, had two choices: they could tell the Bank’s shareholders about the huge material losses at Merrill since the merger proxy was filed, or they could hide them. Bank management chose to hide the information. In particular, Bank management failed to disclose that by December 5, 2008, the day Bank of America shareholders voted to approve the merger with Merrill Lynch, Merrill had incurred actual pretax losses of more than $16 billion. Bank management also knew at this time that additional losses were forthcoming and that Merrill had become a shadow of the company Bank of America had described in its Proxy Statement and other public statements advocating the merger. The Bank’s management thus left the Bank’s shareholders in the dark about fundamental changes at Merrill that were obviously important to their voting decision. These disclosure failures violated New York’s Martin Act.
Having obtained shareholder approval for the deal, Lewis then misled federal regulators by telling them that because 50% of Merrill’s tangible equity had disappeared, the Bank could not complete the merger without an extraordinary taxpayer bailout. Lewis went onto say how the Bank needed to “fill the hole” left by the unprecedented losses, which contradicted his public statements to the effect that the Bank would not need additional capital. Remarkably, 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 another $1.4 billion. The Bank’s management has not and cannot explain why they did not disclose to the Bank’s shareholders losses so great that, absent a historic taxpayer bailout, they threatened the Bank’s very existence.
On November 13, when Price knew of at least approximately $5 billion in after tax losses, Bank of America’s General Counsel, Timothy Mayopoulos, and lawyers from its outside law firm, Wachtell, Lipton, Rosen & Katz, determined the Bank should disclose the losses. The lawyers discussed the date of the disclosure, the manner of the disclosure, who would draft the disclosure, and that Price would approach Merrill CEO John Thain about the disclosure. Shortly thereafter, however, the decision was reversed, Wachtell’s role was marginalized, and the Bank made its own decision not to disclose. Outside counsel was never again consulted about disclosure, even after the losses later doubled.
By December 3, Price knew that known losses to date exceeded $8.5 billion after tax and that billions more in losses were coming, because that day he met with executives, including Lewis, to discuss those losses. Lewis was also aware of the disclosure issues, because Price updated him on disclosure and loss issues. Price knew, based on his conversations with Mayopoulos, that crucial to Mayopoulos’ disclosure advice was whether Merrill’s losses for the entire quarter could exceed what occurred in its prior five quarters, a range between $2.1 billion and $9.833 billion after tax. Price only told Mayopoulos about an increase in losses to $7 billion, as opposed to what he actually knew or should have known: that known losses plus further expected losses would exceed $10 billion in total after tax losses.
On December 4, Price learned that Merrill’s actual pretax losses had grown to $11.769 billion, and knew or should have known of an additional $2.3 billion in goodwill writedowns that brought the total to over $14 billion. By December 5, Price knew or was reckless or negligent in not knowing that Merrill’s losses had swelled to $16.2 billion pretax with goodwill (approximately $10.4 billion after tax), surpassing all thresholds set by Mayopoulos. Price did not tell Mayopoulos any of this information prior to the shareholder vote.
Mayopoulos sought out Price to discuss the increased losses, but was told that he was in a closed-door meeting and could not be interrupted. The next morning, before he had a chance to address the increased losses, Mayopoulos was summarily terminated and escorted from the building on the spot. The Bank replaced Mayopoulos with Brian Moynihan, a board favorite who had not practiced law in 15 years, had an inactive bar membership, and held the position for only about six weeks. Moynihan is now the Bank’s CEO.
After the fact, in testimony before this Office and elsewhere, Lewis claimed that this position only changed after the government instructed the Bank not to invoke the MAC clause or renegotiate, but instead to take taxpayer aid in return for completing the merger. Lewis claimed, in effect, that he had been strong-armed by the government.
This account is belied by the facts uncovered by this Office. Contrary to Lewis’ after-the-fact account, the evidence shows that the Bank never intended either to renegotiate or to terminate the merger using the MAC clause. In fact, the Bank’s management knew almost immediately upon conferring with its outside lawyers that renegotiation was impossible, because it meant going back to the shareholders, and public knowledge of the endangered deal would likely destroy Merrill. Likewise, the Bank was informed by its outside lawyers that invoking the MAC clause would likely prove a futile exercise that could destroy the Bank.
The evidence further demonstrates that almost immediately upon reviewing the December 12 loss analysis, the Bank planned to seek taxpayer aid to save the merger, and to use the empty threat of a MAC claim as leverage with the government in negotiations.
The Bank’s plan worked, and it received the taxpayer aid, in an amount exceeding $20 billion, on top of $10 billion already committed prior to the December negotiations, for a total of approximately $30 billion in aid. As a result, the merger closed as planned on January 1.
By this date, the cash portion of Merrill bonuses for 2008—$2.5 billion—had been paid out. These cash bonuses, which with the non-cash portion would eventually total $3.57 billion, were paid for the worst year in Merrill’s history. It was the year, in fact, that would have seen the firm’s destruction absent a taxpayer bailout.
On top of everything, the Bank failed to tell its shareholders that, in addition to buying a company that would have destroyed the Bank without taxpayer aid, it was going to permit that company to pay the $3.57 billion in bonuses in a manner and at a time completely inconsistent with its prior practice. The amount, criteria and timing of the bonus payments were omitted from the proxy.
And the conclusion:
In short, in the process of acquiring Merrill, the Bank’s management misled its shareholders, the public, its board and its lawyers by concealing Merrill’s disastrous fourth quarter financial results in order to secure the shareholders’ uninformed approval of the deal. The Bank’s management then salvaged this potentially crippling situation by extracting billions in taxpayer bailouts by misleading the federal government. They did this, in part, by threatening federal officials that they would terminate the Merger Agreement based on a material adverse change—virtually the same material change they failed to disclosed to their shareholders prior to the vote. This action seeks redress under New York’s Martin Act for this conduct.
We just wonder why there is no criminal component to all these charges against Lewis. We are confused why Bernanke and Paulson are exempt from charges due to their complicity in all these alleged actions.