Lawsuit: Losses at Merrill Lynch were withheld before B of A deal
Litigation will probably reignite concerns that federal regulators, prosecutors were remiss in duties
It has come to light that shortly before Bank of America shareholders
approved the bank's $50 billion purchase of Merrill Lynch in December of
2008, that top bank executives were aware that losses at the investment
firm would haunt combined companies' earnings in the years to come.
Shareholders were not informed about the looming losses, which would
prompt a second taxpayer bailout of $20 billion. Court filings indicate
Kenneth D. Lewis was informed that the Merrill Lynch deal would lead to
huge losses at Bank of America.
What Bank of America's top executives, including CEO Kenneth D. Lewis, above, knew about Merrill's substantial mortgage losses -- and when they knew it have emerged in court documents filed this past weekend in a shareholder lawsuit being heard in Federal District Court in Manhattan.
The news coming to light in private litigation is likely to reignite concerns that federal regulators and prosecutors have not worked hard enough to hold key executives accountable for their actions during the financial crisis.
The filing includes sworn testimony from Lewis in which he concedes that before Bank of America stockholders voted to approve the deal that he had received loss estimates relating to the Merrill deal that were far more substantial than was reported in the figures that had appeared in the proxy documents filed with regulators.
B of A's purchase of Merrill, made during the depths of the financial crisis in 2008, was the culmination of an acquisition binge by Lewis that transformed Bank of America from its base in North Carolina into a financial mammoth that could compete head-to-head with the biggest institutions on Wall Street.
The transaction also saddled the bank with billions in losses and required an additional $20 billion from taxpayers on top of an earlier bailout it received in 2008.
Bank of America officials declined to comment. Lewis' attorney Andrew J. Ceresney also declined to comment on the filing. He did refer to a motion filed on behalf of Lewis contending that the former chief executive did not disclose the losses because he had been advised by the bank's law firm, Wachtell, Lipton, Rosen & Katz, and by other bank executives that it was not necessary.
Lewis discussed the tumultuous period between the announcement of the merger in September 2008 and the shareholders' vote on the deal on Dec. 5, 2008 in a deposition taken on March 27 of this year.
Filed on behalf of Bank of America shareholders, the suit asserts that the bank's executives misled them by not disclosing Merrill's mounting mortgage losses in proxy documents recommending approval of the deal.
The proxy statement estimated that the purchase of Merrill Lynch would reduce earnings by only three percent in 2009, would not hurt the bank's profits in 2010 and might actually add a bit to them.
Lewis echoed this view at the meeting where shareholders voted on the deal. When asked whether the transaction would dilute Bank of America's earnings in coming years or add to its income.
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