NEW YORK/ORLANDO, Florida (Reuters) – New York's attorney general charged Bank of America Corp (BAC.N), 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.
Invoking a powerful state law used to combat securities fraud, New York Attorney General Andrew Cuomo filed a civil lawsuit on Thursday accusing Bank of America, Lewis and Price of intentionally failing to disclose massive losses at Merrill prior to a December 5 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.
Merrill lost $15.8 billion in the fourth quarter of 2008, but Cuomo said just $1.4 billion surfaced between the December 5 vote and when the bank began to raise alarms in Washington.
"The behavior is just egregious and reprehensible," Cuomo said on a conference call. His office said the bank's current Chief Executive Brian Moynihan is not under investigation.
Moynihan took over when Lewis retired after four decades at the bank at the end of 2009; the lawsuit may distract him from efforts to improve performance. Price was last month named head of consumer, small business and card banking.
Bank of America took $20 billion of federal bailout money from the Troubled Asset Relief Program in mid-January 2009, two weeks after the merger closed. The Charlotte, North Carolina-based lender has since repaid that sum.
"Change is so obviously needed at Bank of America," lamented Neil Barofsky, the TARP special inspector general, on the conference call.
"SERIOUS BLOW"
Cuomo filed 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.
Lewis joins Countrywide Financial Corp's Angelo Mozilo among major U.S. financial services chief executives to face civil fraud charges by regulators over conduct since a global credit crisis began in roughly the middle of 2007.
The SEC charged Mozilo last June with securities fraud and insider trading over trading that took place mainly in 2007. Bank of America bought Countrywide in 2008.
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.
"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 September 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.
David Markowitz, head of New York's investor protection bureau, on the conference call said Moynihan played no role in disclosure-related discussions prior to the shareholder vote.
He also said Moynihan "has been candid with our office" as to the role he played 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.
In a court filing, SEC lawyer Scott Black wrote that the terms "provide an effective means of corporate reform that would help to avoid future violations."
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.
As to Lewis and Price, Cuomo's lawsuit attempts to do that. "The benefit of a settlement is you have an immediate action, you can implement immediate reforms," while a lawsuit at the same time can "bring people to justice," Cuomo said.
Rakoff is scheduled to hold a hearing on SEC litigation against the bank on Monday afternoon.
Bank of America shares fell 60 cents, or 3.9 percent, to $14.93 in afternoon trading on the New York Stock Exchange. They traded at $33.74 before the Merrill merger was announced.
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 and Gerald E. McCormick)
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