Financial Regulatory Forum

New York charges Bank of America, ex-CEO with fraud; SEC settles

By Reuters Staff
February 5, 2010

By Jonathan Stempel and Joe Rauch

NEW YORK/ORLANDO, Fla., Feb 4 (Reuters) – New York’s attorney general charged Bank of America Corp former Chief Executive Kenneth Lewis and former Chief Financial Officer Joe Price with fraud for allegedly misleading shareholders about the acquisition of Merrill Lynch & Co.

The U.S. Securities and Exchange Commission separately said Bank of America agreed to pay a $150 million civil fine and bolster disclosure and governance practices to settle its two lawsuits alleging poor disclosure of Merrill’s losses and $3.6 billion of bonus payouts. That accord requires court approval.

Thursday’s civil lawsuit by New York Attorney General Andrew Cuomo could complicate efforts by new Bank of America CEO Brian Moynihan to revive the largest U.S. bank.

Moynihan replaced Lewis, who retired under pressure at the end of 2009 after four decades at the bank.

Lewis, 62, joins Countrywide Financial Corp’s Angelo Mozilo among major U.S. financial services chief executives to face civil regulatory fraud charges over conduct since a global credit crisis began in the middle of 2007.

Separately, Senator Carl Levin criticized Bank of America for failing to scrutinize questionable accounts by a notorious arms dealer and flag them for possible money laundering.

Cuomo, invoking a powerful state law used to combat securities fraud, accused Bank of America, Lewis and Price of intentionally failing to disclose massive losses at Merrill prior to a Dec. 5, 2008 shareholder vote on the merger.

Cuomo also alleged that the defendants later misled the federal government in arguing that a “surprise” increase in Merrill’s losses would allow Bank of America to back out of the merger if it did not get massive taxpayer help.

His lawsuit seeks unspecified monetary damages and other remedies.

Merrill lost $15.8 billion in the fourth quarter of 2008, but Cuomo said just $1.4 billion surfaced between Dec. 5 and when Bank of America began to raise alarm bells in Washington.

“The behavior is just egregious and reprehensible,” Cuomo said on a conference call with reporters.

Bank of America took $20 billion of bailout money from the federal government’s Troubled Asset Relief Program to help absorb Merrill. It has since repaid that sum.

“Change is so obviously needed at Bank of America,” said Neil Barofsky, the TARP special inspector general, on the conference call.

Price remains at the bank, and was last month named head of consumer, small business and card banking.

David Markowitz, who heads Cuomo’s investor protection bureau, said Moynihan is not under investigation.

“SERIOUS BLOW”

Cuomo filed the charges under the Martin Act, a New York law giving him extraordinary power in securities litigation and fighting financial fraud. The law dates from 1921, more than a decade before the SEC was created.

Bob Stickler, a Bank of America spokesman, called Cuomo’s charges “regrettable” and without merit.

“The evidence demonstrates that Bank of America and its executives, including Ken Lewis and Joe Price, at all times acted in good faith and consistent with their legal and fiduciary obligations,” he said.

Lewis’ lawyer Mary Jo White, a former U.S. Attorney in New York and now a partner at Debevoise & Plimpton LLP, called the decision to sue “badly misguided,” saying: “There is not a shred of objective evidence to support the allegations.”

William Jeffress, a partner at Baker Botts LLP who represents Price, said his client also denies Cuomo’s charges, and called “utterly false” the charge that Price deliberately encouraged the withholding of information from shareholders.

“This is a serious blow for the bank,” said Tony Plath, a finance professor at the University of North Carolina at Charlotte. “This doesn’t look like it’s going to go away any time soon.”

It is unclear how Cuomo’s lawsuit might affect Price’s consumer banking responsibilities. Like many rivals, the bank faces elevated credit losses in a weak economy, though the sums it has set aside for bad loans have begun to decline.

“Is Price now going to spend his time preparing his defense, instead of getting retail straightened out?” said Nancy Bush, a principal at NAB Research LLC.

Bank of America shares closed down 5 percent at $14.75 on the New York Stock Exchange. The KBW Bank Index <.BKX> of big lenders fell 4.3 percent. Bank of America traded at $33.74 before the Merrill merger was announced.

“HUBRIS” ALLEGED

Cuomo, the SEC and Congress have long attacked the handling of the Merrill merger, which was put together over a weekend and announced on Sept. 15, 2008, the same morning that Lehman Brothers Holdings Inc <LEHMQ.PK> went bankrupt.

“Throughout this episode, the conduct of Bank of America, through its top management, was motivated by self-interest, greed, hubris, and a palpable sense that the normal rules of fair play did not apply to them,” Cuomo’s complaint said.

“Management thought of itself as too big to play by the rules and, just as disturbingly, too big to tell the truth,” it added.

On the conference call, Markowitz said Moynihan had no role in disclosure-related discussions before the shareholder vote. He also said Moynihan “has been candid” about his role after becoming the bank’s general counsel in mid-December 2008.

The SEC settlement directs the $150 million penalty to a fund for the bank’s shareholders. It also calls for several governance and disclosure changes over a three-year period.

These changes include giving shareholders a voice on executive pay, taking extra steps to insure the independence of directors on its compensation committee, and posting incentive pay practices in a prominent place on its website.

The settlement requires approval by U.S. District Judge Jed Rakoff, which is not a sure thing.

In September, he rejected a $33 million SEC settlement with the bank over the lack of bonus disclosures, in part because it did not hold any individual bank executives, bank directors or outside lawyers responsible for failures.

“How does taking more money out of Bank of America enable Rakoff to sleep better at night when he was upset before that the shareholders would have to pay?” said James Cox, a securities law professor at Duke University.

Cuomo maintained that “the benefit of a settlement is you have an immediate action, you can implement immediate reforms,” while his simultaneous lawsuit can “bring people to justice.”

Rakoff is scheduled to hold a hearing on SEC litigation against the bank on Monday afternoon.

The New York case is New York v. Bank of America Corp et al, New York State Supreme Court, New York County. The SEC cases are SEC v. Bank of America Corp, U.S. District Court, Southern District of New York, Nos, 09-06829 and 10-00215.

(Reporting by Joe Rauch in Orlando, Florida and Jonathan Stempel in New York; Additional reporting by Elinor Comlay and Steve Eder in New York, and Rachelle Younglai in Washington; editing by John Wallace, Gerald E. McCormick and Tim Dobbyn) ((jon.stempel@thomsonreuters.com +1 646 223 6317; Reuters Messaging: jon.stempel.reuters.com@reuters.net))

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