BofA and the fraudster
Ken Lewis spent much of the day on Capitol Hill getting grilled about Bank of America’s acquisition of Merrill Lynch during the heat of the financial crisis. But Lewis may have bigger things to worry about down the road, as his bank’s past dealings with a hedge fund fraudster just won’t go away.
A federal appeal court, in a little-noticed ruling, reinstated an aiding-and-abetting claim filed against BofA by some former investors of Michael Lauer, who master-minded a billon dollar hedge fund fraud. A federal trial court judge in New York had dimissed the case against Bofa, which was the prime broker for Laurer’s $1 billion Lancer funds. But the appeals court, without determining the merits of the allegations, says the investors should be able to press ahead with their claim against the big bank.
Scott Berman, the lawyer representing the investors in the lawsuit, says the bank could be liable for hundreds of million in damages, if the lawsuit is successful. Berman’s clients claim that BofA, as prime broker, should have known that Lauer was falsifying his funds’ valuations in order to inflate management fees.
Lauer managed to garner a number of prominent investors for his domestic and offshore funds, including Britney Spears, the University of Montreal Pension Plan and Morgan Stanley.
The Securities and Exchange Commisssion, last September, prevailed in a lawsuit charging Lauer with defrauding investors by falsifying valuations and manipulating several of the penny stocks his fund had invested heavily in.
It’s too early to say how this lawsuit will turn out for Bofa. But one thing is certain: no one is claiming Bofa was pressured into serving as a prime broker for Lauer.