Bank of America Deathwatch: $50 Billion Securities Fraud Suit Over Merrill Acquisition
If mortgage litigation and losses on second mortgages aren’t enough to put Bank of America in a terminally impaired state, the $50 billion private lawsuit filed earlier today represents another major blow.
In short form: when Bank of American bought Merrill, the suit claims failed to disclose $15.31 billion loss around the time of the acquisition. It further alleges that this loss was deliberately hidden to assure the deal would be approved by shareholders. The suit charges that senior executives, including the former CFO, Joseph Price, didn’t tell the general counsel, Timothy J. Mayopoulos, about the full extent of the losses. Mayopoulos had been told the losses were roughly $5 billion. He had initially wanted them to be presented, but later decided against it (one has to assume due to pressure from CEO Ken Lewis and others) because it was within the range of recent Merrill quarterly losses. He was told two days before the shareholder vote the losses would be $7 billion, but that was still in a range that investors would arguably expect. They were actually $11 billion the day of the vote. Four days later, at a board meeting, Mayopoulos found out about the larger loss figures and tried to meet with Price. Mayopoulos was fired the next day.
Note that that the SEC sued the Charlotte bank over the very same issue. Judge Jed Rakoff rejected the initial $33 million settlement as inadequate, and reluctantly approved the sweetened $150 million deal, noting it didn’t impose enough costs on the executives involved.
This is a particularly clear-cut case. Steven Davidoff, a former deal lawyer turned law professor who writes regularly for the New York Times’ Dealbook, and tends to be conservative in his assessment of litigation, says that if certain facts alleged in the lawsuit prove to be accurate, “…this is a prima facie case of securities fraud.” And he continues:
Plaintiffs in this private case have the additional benefit that this claim is related to a shareholder vote. It is easier to prove securities fraud related to a shareholder vote than more typical securities fraud claims like accounting fraud. Shareholder vote claims do not require that the plaintiffs prove that the person committing securities fraud did so with awareness that the statement was wrong or otherwise recklessly made. You only need to show that the person should have acted with care.
This case is not only easier to establish, but the potential damages could also be enormous. Damages in a claim like this are calculated by looking at the amount lost as a result of the securities fraud. A court will most likely calculate this by referencing the amount that Bank of America stock dropped after the loss was announced; this is as much as $50 billion. It is a plaintiff’s lawyer’s dream.
Bank of America is facing a huge liability from this claim. It is also facing even more liability for those who bought and sold stock during this period up until Jan. 15. In a ruling on July 29, the judge in this case allowed these claims to proceed against Bank of America, Mr. Price and Mr. Lewis. The judge had already ruled that the disclosure claim related to the proxy vote could proceed.
This case is on a relatively fast track, with an October 2012 trial date.
Bank of America is expected to argue that the losses were consistent with what shareholders expected, given that a good will write off of $2 billion was already disclosed, and they didn’t know the full extent of the damage at the time of the vote. My guess is that if that is the best defense they can mount, they are going to have to write a very large check.