Feb. 4 (Bloomberg) -- When Bank of America Corp.’s board met to approve the acquisition of an investment bank on Sept. 15, 2008, members thought they were going to buy Lehman Brothers Holdings Inc., not Merrill Lynch & Co., according to New York Attorney General Andrew Cuomo.
The bank bought Merrill after examining its books for just 25 hours, Cuomo claimed. Shareholders approved the deal Dec. 5, 2008. The acquisition closed Jan. 1, 2009, after Merrill losses had increased by billions of dollars, a change the bank didn’t disclose before the shareholder vote, Cuomo said.
“It’s the way we approved acquisitions that ticks me off the most!!!” director Chad Gifford later wrote in an e-mail about the last-minute switch, according to a securities-fraud complaint Cuomo filed today in New York against the bank, former Chief Executive Officer Kenneth Lewis and ex-Chief Financial Officer Joe Price over their handling of the Merrill deal.
E-mails and written notes that were gathered by Cuomo for his investigation of the matter show personal reactions of executives as they learned of Merrill’s rising losses, which reached $16 billion before taxes by December 2008. They also show Merrill kept Price informed of the losses as they grew, yet he resisted pressure from his lawyers to disclose them to shareholders.
“Read and weep,” wrote Bank of America accounting officer Neil Cotty to Price on Nov. 4, 2008, when Merrill’s financial reporting unit forwarded preliminary October results with a loss of $6 billion. The merger documents had already gone out to shareholders. Five days later, the October loss was put at $7.5 billion before taxes.
When Price asked for a review of whether the losses -- then $5 billion after taxes -- should be disclosed to shareholders, his general counsel Timothy Mayopoulos said they should. An e- mail from Eric Roth, a partner at the bank’s outside law firm, Wachtell, Lipton, Rosen & Katz, sought research within his firm on “the duty to disclose,” according to the lawsuit.
Roth’s notes from a call with Wachtell Lipton partner Warren Stern say, “duty to bring to shareholders all info material to vote.” The firm told the bank it should disclose the losses, Cuomo claims.
The law firm was “marginalized” by the bank after that, choosing not to disclose, Cuomo claimed. Mayopoulos was later fired by Price and replaced by Brian Moynihan, who later became CEO, Cuomo said.
The bank said it was “regrettable” that Cuomo filed his charges, which it found to be “totally without merit.” Lawyers for Lewis and Price denied wrongdoing. Wachtell declined to comment in a statement.
Cotty warned Price in December e-mails that Merrill’s evaluation of its securities might be too optimistic, so there may be “downside” in its estimated results.
Lewis by then was worried about his job, according to an e- mail from Federal Reserve Bank of Richmond Senior Vice President Mac Alfriend that is cited by Cuomo.
Lewis “is worried about stockholder lawsuits; knows they did not do a good job of due diligence and the issues facing the company are finally hitting home and he is worried about his own job after cutting loose lots of very good people,” Alfriend wrote on Dec. 23.
Lewis did not want to tell shareholders of the pending government bailout and asked “whether he could use as a defense” that the government didn’t want him to disclose, according to an e-mail from Fed Chairman Ben Bernanke. “I said no,” Bernanke wrote.
The case is People of State of New York v. Bank of America, State Supreme Court (Manhattan).
To contact the reporter on this story: Linda Sandler in New York at email@example.com.
Last Updated: February 4, 2010 17:45 EST