B of A Suit Pits Privacy vs. Need to Know

The banker's instinct for the shade of confidentiality has come into conflict with the shareholder's desire for sunlight.

A lawsuit filed late Thursday accuses BankAmerica Corp. of failing to warn shareholders of looming losses at D.E. Shaw & Co. - and more suits are expected.

The suit alleges that BankAmerica chief executive officer Hugh L. McColl failed "to disclose any trends that would materially affect earnings and the present and future financial operating results" of the company when he discussed its hedge fund exposure at an Oct. 1 press conference. The suit was filed in U.S. District Court for the Eastern District of New York.

BankAmerica, which disclosed the Shaw-related loss on Oct. 14, said it had warned of the problem, as it understood it, on Sept. 15, when it announced that third-quarter earnings would be lower than expected. It did not specifically mention Shaw at the time.

At that point BankAmerica had a choice: defend a relationship with a troubled but potentially lucrative client or risk the wrath of shareholders by protecting the client's confidentiality.

As banks grow into massive global conglomerates, investors will have to grapple with the fact that banks need not disclose faraway loans or investments that carry big risks. It is up to the courts to decide if BankAmerica officials provided enough disclosure in advance about D.E. Shaw. Some analysts think they did.

"The fact is D.E. Shaw is a private firm; it wasn't owned by BankAmerica," said Raphael Soifer, a banking analyst at Brown Brothers Harriman & Co. "I don't think BankAmerica is in the habit of reporting earnings or warning shareholders about companies they don't own."

But when a client has received a big loan and its performance is draining earnings of a publicly traded company, shareholders are arguing, they should be warned.

"BankAmerica had a huge investment in D.E. Shaw," said Mark C. Gardy, one of the attorneys behind the suit, which seeks class-action status for shareholders who bought BankAmerica stock from Oct. 1 through Oct. 13. "They can try to dance around that all they want."

Meanwhile, a dispute broke out over a published report about BankAmerica's disclosure strategy.

The Wall Street Journal, quoting chief financial officer James Hance, reported Friday that the company knew of D.E. Shaw's troubles in August. BankAmerica, the story said, believed that earlier disclosure would have "jeopardized" D.E. Shaw.

Later Friday, BankAmerica said in a press release that the Journal article was a "serious distortion of the facts."The Journal replied: "Our article quotes Mr. Hance correctly."

The questions shareholders want answered include what Mr. McColl knew about D.E. Shaw's losses and when he knew it.

BankAmerica said Friday that most of D.E. Shaw's losses occurred rapidly in the last week of September and the first week of this month-days after Long-Term Capital Management LP was rescued from collapse on Sept. 23. The company said no announcement was made about Shaw because no one was certain of the damage until the evening of Oct. 13, just before third-quarter earnings were released.

While the bank was figuring out its problem with one hedge fund, it was writing down its exposure at another-Long-Term Capital.

The bank had an estimated $100 million exposure to Long-Term Capital, but Prudential Securities bank analyst Joel Silverstein it has "substantially written off" this exposure in recent weeks.

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