New York: Days before Bank of America shareholders approved the bank's $50 billion purchase of Merrill Lynch in December 2008, top bank executives were advised that losses at the investment firm would most likely hammer the combined companies' earnings in the years to come.
Shareholders, however, were not told about the looming losses, which would prompt a second taxpayer bailout of $20 billion, leaving them instead to rely on rosier projections from the bank that the deal would make money relatively soon after it was completed.
What Bank of America's top executives, including its chief executive then, Kenneth D. Lewis, knew about Merrill's vast mortgage losses and when they knew it emerged in court documents filed Sunday evening in a shareholder lawsuit being heard in the US district court in Manhattan.
The disclosure, coming to light in private litigation, is likely to reignite concerns that federal regulators and prosecutors have not worked hard enough to hold key executives accountable for their actions during the financial crisis.
The filing in the shareholder suit included sworn testimony from Lewis in which he concedes that before Bank of America stockholders voted to approve the deal he had received loss estimates relating to the Merrill deal that were far greater than those that had appeared in the proxy documents filed with regulators.
Shareholders rely on statements made in proxy filings to decide whether to approve transactions their companies have proposed, and companies must disclose all facts that could be meaningful for shareholders trying to decide how to vote on a deal.
The transaction saddled the bank with billions in losses and required an additional $20 billion from taxpayers on top of the $15 billion bailout it received in 2008.
Bank of America officials declined to comment. Andrew J. Ceresney, a lawyer for Lewis, also declined to comment on the filing, but he referred to a motion filed on behalf of Lewis on Sunday contending that the former chief executive did not disclose the losses because he had been advised by the bank's law firm, Wachtell, Lipton, Rosen & Katz, and by other bank executives that it was not necessary.
The suit, filed on behalf of Bank of America shareholders, asserts that the bank's executives misled them by not disclosing Merrill's mounting mortgage losses in proxy documents recommending approval of the deal.
For example, the proxy statement estimated that the purchase of Merrill Lynch would reduce earnings by only 3% in 2009, would not hurt the bank’s profits in 2010 and might actually add a bit to them. Lewis echoed this view at the meeting where shareholders voted on the deal. When asked whether the transaction would dilute Bank of America’s earnings in coming years or add to its income, he referred the questioner to the proxy statement.
But in sworn testimony taken in the case, Lewis testified that by the time shareholders voted, the merger’s effect on Bank of America’s profit outlook had changed. According to the court filing, Lewis confirmed that the bank “expected the merger to be more than 13% dilutive in 2009 and 2.8% dilutive in 2010.”
Asked by Steven B. Singer, a lawyer at Bernstein Litowitz Berger & Grossmann LLP who represents the plaintiffs, whether the figures shareholders had received in the proxy statement were no longer accurate on the date of the merger vote, Lewis said: “They were not those numbers, no.”
Singer declined to comment on the filing. But the document submitted to the court said that Lewis’s “sworn admissions leave no genuine dispute that his statement at the 5 December shareholder meeting reiterating the bank’s prior accretion and dilution calculations was materially false when made.”
©2012/The New York Times