White Collar and Securities: New York AG Sues Bank of America for Fraud

The New York Attorney General sued Bank of America last week as the bank had reached a settlement with the Securities and Exchange Commission involving two other enforcement actions. The AG's suit, filed in New York state court, alleges that BofA and two of its former officers committed securities fraud in connection with the bank's acquisition of Merrill Lynch. The two officers named in the complaint are Kenneth D. Lewis, former chief executive officer, and Joe L. Price, former chief financial officer.

The complaint alleges that the bank and its officers misled BofA shareholders and lied to the federal government in connection with the bank's December 2008 acquisition of the brokerage giant. First, the AG alleges that BofA failed to disclose to its shareholders at the time of the acquisition the full extent of Merrill Lynch's losses, which totaled more than $16 billion. The significance of this failure is that BofA failed to disclose a material fact (ML's loss information) to BofA shareholders who voted to authorize the merger. Second the complaint alleges that, while keeping BofA shareholders ignorant of the Merrill loses, BofA told federal bank officials that the magnitude of the losses had caused BofA to consider backing out of the acquisition unless the government provided a second bank bailout. The AG contends that BofA's threat to the government to withdraw from the acquisition was a gross overstatement of the facts. If proved, these allegations would constitute securities fraud under New York's Martin Act.

At the same time that the Attorney General announced the filing of the lawsuit, BofA and the SEC announced a settlement of two SEC actions against the bank. One of the SEC suits addressed billions in bonuses that BofA allowed Merrill to pay shortly before the merger. The second suit involved the $16 billion in losses sustained by Merrill. The parties reached a $150 million settlement to end both suits.

Federal District Judge Jed Rakoff must approve the bank's settlement with the SEC. Judge Rakoff had earlier rejected a $33 million settlement of the SEC's first lawsuit. In rejecting that proposed settlement the judge had objected to the size of the settlement amount and the fact that the SEC had not charged any BofA officials. The current proposed settlement between BofA and the SEC, while much larger, covers two actions and still does not charge any individuals.

The bank responded to the New York charges by pointing to the fact that the SEC had investigated the matter and did not see fit to charge any individuals. In view of Judge Rakoff's earlier questioning of the SEC's failure to charge individuals and the necessity for the judge to approve the proposed settlement with the SEC, the bank's comments seem ill considered at this stage of the the litigations.

For more information about the government lawsuits against Bank of America, please The New York Times, "Cuomo Sues Bank of America as It Settles With S.E.C.", February 6, 2010, http://www.nytimes.com/2010/02/05/business/05cuomo.html?scp=2&sq=cuomo&st=cse