Bank of America's legal team already has its hands full with New York State Attorney Andrew Cuomo filing four charges of securities fraud. Now a judge has formally rejected the $33 million settlement between the SEC and Bank of America and stated flatly that BofA lied to shareholders before they voted to approve the $50 billion merger with Merrill Lynch. The glistening new Atlantic Wire rounds up reaction from around the Internet, and the reaction sounds a lot like clapping. I'll offer a concurring opinion. I think it's fairly clear that Bank of America lied, possibly on numerous occasions. Here's the story, in all its weird glory*:
The central issue in the SEC suit is whether BofA misled shareholders about bonuses for Merrill employees. Former Merrill CEO John Thain was reported fired in January, partly for paying these gargantuan bonuses. But in the SEC suit this summer, BofA said in a brief: "It Was Widely Understood From Merrill Lynch's Public Disclosures that Merrill Lynch Intended to Pay Multi-Billions of Dollars in Year-End Incentive Compensation" dating back to October 2008 -- three months before Thain's resignation. That's Strange Thing #1.
Strange Thing #2: BofA CEO Ken Lewis' testimony this summer that he tried to back out of the Merrill merger in December. Let's consider the timeline of events (see right). On Dec. 3, BofA revised Merrill's loses by $2 billion. It considered this update "not material" using perhaps the most liberal interpretation of the word material I've heard. On Dec. 5, BofA shareholders, ignorant of this new internal forecast, approved the deal.
Strange Thing #3: Two weeks later, Merrill's quarterly loss increased by another $2-3 billion. More than "material," this revelation inspired Lewis to try to void the deal entirely.
Strange #4: That weekend, former Treasury Sec. Hank Paulson and Lewis both testified, Paulson threatened to force Lewis out of his chairmanship, and Lewis capitulated. Again, no word of this meeting reached shareholders until Cuomo released Lewis' testimony, which strikes me as a fairly clear-cut violation of fiduciary duty.
But I call my agreement a "concurring opinion" because I have reservations about BofA's culpability. Consider the time of the merger. Bank of America agreed to buy Merrill Lynch the same weekend Lehman Brothers failed, rescuing Merrill from a similar fate which would gutted the stock market and torn a hole in the financial system. When Lewis ran to Paulson three months later asking to get out, Paulson's threat was an extraordinary act of government power, suitable perhaps for an extraordinary time. But if the government found it necessary to effectively blackmail the CEO of the nation's largest commercial bank, and the country accepted Paulson's actions as extra-legal but necessary, was it also extraordinary, extralegal and ultimately necessary for the nation's largest commercial bank to similarly bend the rules of law to assure the rescue merger? I don't claim to have any expertise in securities or M&A law, but it will be interesting to see whether that argument holds up in court for BofA's lawyers better than the SEC settlement did.