Former Bank of America CEO Kenneth Lewis agreed to pay $10 million and to be barred from serving as an officer or director of a public company for three years to settle fraud charges brought by the New York Attorney General based on the firm’s acquisition of Merrill Lynch just prior to the bankruptcy of Lehman Brothers. The settlement “represents one of the first successful attempts by law enforcement to hold accountable a CEO or individual at a major institution since the financial crisis,” according to the New York AG. The bank also agreed to pay $15 million toward the expenses of the Attorney General’s investigation and to certain ancillary relief. New York v. Bank of America Corp., New York State Supreme Court, New York County, No. 450115/2010.
The suit against Bank of America was once of the most significant arising out of the market crisis. Following the institution of a similar complaint by the Securities and Exchange Commission, the New York AG filed suit against the Bank and two senior officers alleging that investors were defrauded when the financial institution agreed to acquire the then financially troubled broker-dealer for $50 billion as Lehman Brothers was collapsing and the market crisis was spiraling out of control. The complaint claimed that investors were not told the true financial condition of Merrill which at the time was rapidly deteriorating. Indeed, by the time of the December 2008 shareholder vote, losses totaled over $15 billion. Investors also were not told that the bank agreed to the payment of over $3 billion in bonuses for Merrill employees despite the desperate financial condition of the firm.
Bank of America continued to conceal the true financial condition of the broker even after the shareholder vote, according to the NYAG’s complaint. In seeking Federal financial assistance the bank claimed that there had been a “material adverse” change. The facts regarding the fraud did not emerge until mid- January 2009 when the losses lead to a $50 billion sell-off in the shares of the Bank.
The settlement yesterday only resolves a portion of the case. The bank and Mr. Lewis settled while a third defendant, former CFO Joe Price did not. The Attorney General announced that he intends to file a motion for summary judgment against Mr. Price shortly.
Under the terms of the settlement the bank will pay $15 million toward the cost of the investigation. Previously, the bank resolved a shareholder suit based on similar facts, agreeing to pay $2.43 billion. Under New York law the AG cannot secure damages for shareholders who have settled a class action. The firm also agreed to continue certain corporate reforms and institute others. Under the terms of the settlement Bank of America will create a special committee to review large acquisitions.
Prior to the New York action the SEC filed a complaint based on Exchange Act Section 14(a) against the bank, but not any of its officers. SEC v. Bank of America Corporation, Civil Action No. 09-5829 (S.D.N.Y.). Judge Rakoff refused to enter an initial settlement under which the bank would have paid $30 million and adopted certain corporate reforms. After a series of hearings, the filing of another case, and a detailed review of the evidence by the Court, a tentative settlement was reached under which Bank of America consented to the entry of a Section 14(a) injunction, agreed to pay $150 million and to adopt a series of corporate reforms for three years which included suggestions from the Court. Throughout the process the Commission insisted that it did not have sufficient evidence of scienter to name individuals as defendants. The New York complaint, brought under the Martin Act, alleged both intentional conduct and negligence.
In what might be viewed as a precursor to settlement trends today, the final settlement papers in the SEC action included a detailed recitation of facts prepared by the SEC staff. The bank acknowledged that there was an evidentiary basis for the factual recitations in the statement regarding the acquisition of Merrill Lynch, although its statement was not an admission. Judge Rakoff “reluctantly” agreed to enter the settlement.
For more commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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