The Case Against Bank of America

New York State Attorney Andrew Cuomo is close to slapping Bank of America with four charges of securities-fraud "failures" during its hectic December 2008 merger with Merrill Lynch. As I've written before, it seems quite likely that at least some of Cuomo's charges have common sense, even explicit law, on their side. Let's review the legal strangeness of this epic month:


There's just all sorts of weirdness about the BofA-Merrill merger. Former Merrill CEO John Thain was reported fired in January for paying 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. Strange #1.

Strange #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 #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.

On the other hand, it will be interesting to see how Cuomo's charges actually play out. In December, the financial world was on its knees. Moreover, we were as close to governmentless as you can be, wedged between a outgoing lameduck president and an incoming administration with fewer Treasury officials than you could count on your fingers. If the government found it necessary to effectively blackmail the CEO of the nation's largest commercial bank, perhaps it was also necessary for the naiton's largest commercial bank to similarly bend the rules of law to assure the rescue merger. To be sure I think Ken Lewis probably zig-zagged between one illegal action and another, but it will be interesting to see if BofA's lawyers play the anything-goes-in-crisis card, and if they do so effectively.