photo: The Cornballer via Flickr
Yesterday, New York Attorney General Andrew Cuomo filed a lawsuit against Bank of America, its former Chairman Ken Lewis and CFO Joseph L. Price on civil fraud charges, alleging that they hid information from shareholders about large losses at the investment firm Merrill Lynch, which BofA picked up in a merger, and that they lied to the federal government in order to secure a bailout to cover the losses. If you get a moment, read the summary to the lawsuit. It really does show Bank of America as, in the words of the summary, “a classic example of how the modus operandi of our nation’s largest financial institutions led to the near collapse of our financial system.”
The story is pretty simple: BofA bought Merrill Lynch and never told shareholders about the financial sickness at the heart of the firm. Then, after the purchase, BofA essentially played a game of chicken with the Feds, threatening to back out unless they got a sweetheart deal, even though there was no such clause in the merger agreement that would account for an opt-out. Here’s just a taste of how the world works when you’re a successful American bank:
Thus, Bank management sought taxpayer aid on the basis of actual losses only $1.4 billion more than losses they had deemed unnecessary to disclose to their shareholders, at a time when the shareholders were deciding whether to buy the company generating those losses. The undisclosed losses were enough to ruin the combined entity, as management demonstrated by going to the government for a taxpayer bailout, and would have done so without that bailout.
Having failed in their disclosure obligations, the Bank’s management went on to misrepresent its position to the federal government in negotiations for taxpayer aid. Bank management pretended to the government that it believed it had a viable MAC (merger agreement clause) claim and that it would seek to exit the merger, or that it would try to renegotiate the purchase price.
After the fact, in testimony before this Office and elsewhere, Lewis claimed that this position only changed after the government instructed the Bank not to invoke the MAC clause or renegotiate, but instead to take taxpayer aid in return for completing the merger. Lewis claimed, in effect, that he had been strong-armed by the government.
This account is belied by the facts uncovered by this Office. Contrary to Lewis’ after-the-fact account, the evidence shows that the Bank never intended either to renegotiate or to terminate the merger using the MAC clause. In fact, the Bank’s management knew almost immediately upon conferring with its outside lawyers that renegotiation was impossible, because it meant going back to the shareholders, and public knowledge of the endangered deal would likely destroy Merrill. Likewise, the Bank was informed by its outside lawyers that invoking the MAC clause would likely prove a futile exercise that could destroy the Bank […]
The Bank’s plan worked, and it received the taxpayer aid, in an amount exceeding $20 billion, on top of $10 billion already committed prior to the December negotiations, for a total of approximately $30 billion in aid. As a result, the merger closed as planned on January 1.
(Bank of) America, fuck yeah!
Lewis’ lawyers, in particular, are calling the lawsuit misguided, but the AG spells out a pretty solid case. Just because Cuomo is going after something that was probably standard practice doesn’t mean it was legal. Lewis’ case amounts to “my lawyers told me not to disclose to shareholders,” hardly a defense. But Lewis clearly doesn’t feel like going down alone.
In defending former Bank of America CEO Ken Lewis against charges that he misled investors, his lawyers will call as witnesses former Treasury Secretary Hank Paulson and the current Federal Reserve Chairman Ben Bernanke, according to people close to the matter. The defense team, led by former U.S. Attorney Mary Jo White, hopes to get Paulson and Bernanke to reveal that Lewis did not mislead the government about BofA’s deteriorating financial condition in the aftermath of its Merrill Lynch deal. Those losses prompted a massive government bailout.
White’s first order of business is to get the civil case dismissed, according to several sources. But if she’s unsuccessful, she plans a vigorous defense, including calling high-level government officials to testify. “If this thing goes to trial you can expect both Paulson and Bernanke to be on the witness list,” said one person close to the defense team, “and right now Lewis doesn’t want to settle.”
Now that could be worth watching. Bernanke and Paulson would specifically be called to testify, presumably, about whether or not Lewis was lying to them about backing out of the Merrill deal in order to secure a bailout. That’s a crevice, actually, that the AG could use to explore a whole host of crimes on Wall Street.
Stay tuned.
