New SEC Suit Alleges BofA Hid 'Extraordinary Losses' at Merrill

New SEC Suit Alleges BofA Hid 'Extraordinary Losses' at Merrill
Sue Reisinger
Corporate Counsel
January 13, 2010

The Securities and Exchange Commission filed a new lawsuit Tuesday against Bank of America Corp., claiming the bank failed to disclose billions of dollars in rising losses at Merrill Lynch & Co. Inc. before shareholders voted on a merger in December of 2008.
The new suit will be heard by U.S. District Court Judge Jed Rakoff in Manhattan, who is also handling an earlier SEC suit accusing the bank of misleading shareholders about billions of dollars in Merrill bonuses.
Also See: SEC's New Suit (pdf)
On Monday, Rakoff denied a motion by the Securities and Exchange Commission to add a new charge to its earlier complaint against Bank of America. But Rakoff told the SEC it could bring the charge as a separate case, if it wants.
Rakoff said he wanted to move ahead with the March 1 trial date on the earlier complaint, and there was a danger of confusing the jury by introducing a different charge involving a different set of facts. Rakoff said, in fairness to the bank, it would need more time to pursue its defense and expert testimony against the new allegation.
The new charge accuses the bank of failing to disclose the "extraordinary losses" at Merrill Lynch, before the shareholders voted on Dec. 5, 2008, to approve the merger between the two financial giants.
The SEC wrote a Dec. 31 letter (pdf) to Rakoff asking to add the charge to its earlier complaint, which alleged that the bank failed to disclose Merrill's $5.8 billion bonus pool to the shareholders. The Dec. 31 letter, along with the bank's response (pdf), were made public Monday.
In the letter, the SEC alleges that by the time of the shareholder vote, the bank knew of $4.5 billion in net losses at Merrill in October of 2009, and estimated an additional multibillion-dollar loss for November. "These losses alone constituted more than one-third of the merger value as of December 5, and approximately 60 percent of Merrill's entire losses in the preceding three quarters of the year," the letter stated. Merrill would eventually lose $15.3 billion in the fourth quarter alone.
Responding for the bank, attorney Daniel Kramer said that the new claim has no legal basis, that the SEC didn't act diligently in waiting so close to the March 1 trial date to file the new charge, and that the bank would be prejudiced because the discovery and other pre-trial processes are closed. Kramer is a partner at Paul, Weiss, Rifkind, Wharton & Garrison in New York.
The SEC has issued a press release (pdf) about seeking the new charge. The release also states:
"The SEC's proposed complaint does not seek charges against any individual officers, directors or attorneys. SEC staff has advised the Commission that, after a careful assessment of the evidence and all of the relevant circumstances, it has determined that charges against individuals for their roles in connection with proxy disclosure are not appropriate."
"Bank of America executives at various times discussed the firm's disclosure obligations with internal and external counsel," the release said. "These executives are not alleged to have deliberately concealed information from counsel or otherwise acted with scienter or intent to mislead. Nor is any counsel alleged to have acted with scienter or intent to mislead. For these reasons, the SEC's proposed complaint does not seek charges against any individual officers, directors or attorneys."
In the past, the bank has said that it did not disclose the losses based on advice of outside counsel at Wachtell, Lipton, Rosen & Katz.
The SEC argued that the bank has known the agency might pursue the charge, even at the time of an aborted settlement last September. The SEC has been pursuing discovery on the losses since then until late December, its letter said.
Once the bank waived its attorney-client privilege, the SEC said it questioned a number of financial executives about the losses, as well as Rosemary Berkery, former Merrill general counsel; Timothy Mayopoulos, former Bank of America general counsel who was fired a few days after the shareholder vote; and Wachtell partners Edward Herlihy and Nicholas Demmo.
The first complaint over the bonuses was filed in August of 2008. The SEC and Bank of America then reached a settlement agreement, but Judge Rakoff rejected it in September of 2009 and set the case for trial. The bank has also denied any wrongdoing in not disclosing the bonus pool.