By Karen Freifeld and David Scheer Feb. 4 (Bloomberg) — Former Bank of America Corp. Chief Executive Officer Kenneth Lewis was sued by New York Attorney General Andrew Cuomo for defrauding investors and the government when buying Merrill Lynch & Co. The bank agreed to pay $150 million to settle a related lawsuit by U.S. regulators. Cuomo also sued the bank’s former chief financial officer Joe Price and the bank itself for not disclosing about $16 billion in losses Merrill had incurred before it was bought by Bank of America in an effort to get the merger approved. Afterwards, Lewis demanded government bailout funds, Cuomo said. “We believe the bank management understated the Merrill Lynch losses to shareholders, then they overstated their ability to terminate their agreement to secure $20 billion of TARP money, and that is just a fraud,” Cuomo said today at a telephone press conference. “Bank of America and its officials defrauded the government and the taxpayers at a very difficult time.” Cuomo is pursuing individuals at the bank while the U.S. Securities and Exchange Commission has declined to do so. The suit is being filed under the Martin Act, a New York securities law that permits both civil and criminal penalties. The $150 million SEC settlement still has to be approved by U.S. District Court Judge Jed Rakoff. Last year, Rakoff called the SEC’s initial settlement, which focused on the bank’s bonus disclosures, neither fair nor reasonable and questioned why the bank’s executives and lawyers weren’t sued. The agency said it lacked evidence to bring claims against specific individuals. SEC Coordination Cuomo said he coordinated efforts with the SEC. “Our case will bring individuals to justice and will make a point to people that this is a very serious matter,” he said. “When you settle a case the way the SEC is settling today, the upside is you implement immediate regulatory reforms.” Bank of America , based in Charlotte, North Carolina, is required to take seven steps in the next three years to bolster corporate governance and internal controls. Last month, the SEC expanded its claims against the bank, accusing it of failing to disclose Merrill Lynch’s mounting losses before holding a shareholder vote on the acquisition. The proposed fine would be distributed back to harmed shareholders, the SEC said today. The SEC settlement “addresses the judge’s concerns of penalizing shareholders so it’s likely to pass muster,” said Peter Henning , a law professor at Wayne State University in Detroit. “At the same time, it’s hard to show any monetary damage to shareholders at this point because the Merrill deal has turned out to be a good acquisition for the bank.” Lewis Retirement Neil Barofsky , special inspector general for the Troubled Asset Relief Program, also joined in the investigation. Bank of America was criticized by lawmakers and investors last year for allegedly leaving the public in the dark about Merrill Lynch’s mounting losses and potential bonus payments while seeking to complete the takeover. The uproar helped spur Lewis’s retirement last year. The conduct of Brian Moynihan , the bank’s current chief executive, is not under investigation, said David Markowitz , Cuomo’s special deputy attorney general for investor protection. Moynihan, who became general counsel in the middle of events, was candid with Cuomo’s office in the probe, Markowitz said. Asked whether negotiations with Lewis, Price and Bank of America broke down, the Attorney General’s office said they try to settle cases, though it doesn’t always work. According to the complaint, Lewis and his lieutenants Moynihan and Price calculated that if they threatened “to get out of the deal, the federal government would counter with more taxpayer funds out of a concern for the greater economy.” The U.S. injected $45 billion into Bank of America through the purchase of preferred shares, including $20 billion approved after the acquisition in January 2009 to keep the deal from collapsing. The bank redeemed the shares in December. Bank Is Disappointed “We find it regrettable and are disappointed that the NYAG has chosen to file these charges, which we believe are totally without merit,” the bank said in a statement. “In fact, the SEC had access to the same evidence as the NYAG and concluded that there was no basis to enter either a charge of fraud or to charge individuals. The company and these executives will vigorously defend ourselves.” Lawyers for Lewis and Price denied wrongdoing. “The allegation that Mr. Price deliberately caused Bank of America to withhold from shareholders information they were entitled to know is utterly false,” said William H. Jeffress Jr. and Julia E. Guttman of Baker Botts LLP in Washington, in a statement. Misguided Decision “The decision by Mr. Cuomo to sue Bank of America, Mr. Lewis and other executives in connection with BofA’s acquisition of Merrill Lynch is a badly misguided decision without support in the facts or the law,” said Mary Jo White of Debevoise & Plimpton LLP in New York, who represents Lewis. “There is not a shred of objective evidence to support the allegations by the Attorney General.” Bank of America agreed to buy Merrill on Sept. 15 after just 25 hours of due diligence, according to the suit. When the board of directors met that day to approve the transaction, they thought they were going to buy Lehman Brothers Holdings Inc., the suit says. Cuomo said Bank of America scheduled a shareholder vote to approve its plan to buy Merrill on Dec. 5, 2008. By that date, Merrill incurred losses of more than $16 billion, Cuomo said. Bank of America’s management, including Lewis and Price, knew of the losses and knew that more were coming, Cuomo said. After the merger was approved, Lewis told federal regulators the bank couldn’t complete the deal without a taxpayer bailout because of accelerated losses from Merrill, Cuomo said. However, between the time the shareholders approved the deal and the time Lewis sought the bailout, Merrill’s losses only increased by $1.4 billion, Cuomo said. Greed, Hubris “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 said in the lawsuit. “Bank of America’s management thought of itself as too big to play by the rules and, just as disturbingly, too big to tell the truth.” The suit, filed in New York state Supreme Court in Manhattan, seeks monetary relief and injunctions. Markowitz said the suit came after 75 days of testimony and the review of more than a million documents. He said no monetary demand has yet been made. The suit claims Bank of America received more than $20 billion in taxpayer aid as a result of their misleading efforts. Cuomo’s statement said the bank can’t explain why they didn’t disclose the losses to shareholders though the merger “would have threatened the bank’s very existence if there had been no taxpayer bailout.” Mayopoulos Fired Cuomo also claims management failed to disclose to shareholders it was allowing Merrill to pay $3.57 billion in bonuses. Nor did the bank’s management tell the bank’s lawyers about the extent of Merrill’s losses before the shareholder vote. Cuomo’s suit also alleges the bank’s former general counsel, Timothy Mayopoulos , was fired after he confronted Price after the shareholder vote when he learned of Merrill’s losses. Cuomo says Mayopoulos was intentionally misled beforehand. Mayopoulos was replaced by Moynihan, then head of Bank of America’s Global Corporate Investment Bank, the complaint says. Wachtell Lipton On Nov. 13, when Price knew of at least $5 billion in after-tax losses, Mayopoulous and lawyers from Wachtell, Lipton, Rosen & Katz, the bank’s outside law firm, decided to disclose the losses, the suit says. However, the decision was reversed and Wachtell’s role was “marginalized,” the suit says. Wachtell partner Theodore N. Mirvis declined to comment. The suit also alleges the bank never intended to renegotiate or terminate the merger based on the material adverse change clause in the deal. Renegotiation was impossible, they knew from outside counsel, “because public knowledge of the endangered deal would likely destroy Merrill,” the suit says. Moynihan, who acted as general counsel for Bank of America for about six weeks, had not practiced law in 15 years and had an inactive bar membership, the complaint says. Robert Stickler , a spokesman for Bank of America, said Cuomo’s office has “no intention” of charging Moynihan “because they believe he was not complicit in their scenario, which is based on snippets of facts taken out of context and at times embellished in order to concoct a reasonable scenario.” The case is People of State of New York v. Bank of America, State Supreme Court (Manhattan). To contact the reporter on this story: Karen Freifeld in New York State Supreme Court in Manhattan at kfreifeld@bloomberg.net and; David Scheer in Washington at dscheer@bloomberg.net .
