New York Attorney General Andrew Cuomo filed civil securities fraud charges against former Bank of America CEO Kenneth Lewis and former Chief Financial Officer Joseph Price, alleging they decided not to disclose mounting losses at Merrill Lynch & Co. before getting shareholder approval to acquire the Wall Street firm.
Shareholders approved the purchase on Dec. 5, 2008, not knowing that Merrill had accumulated more than $16 billion in "actual losses" for the fourth quarter of 2008, according to the attorney general. The bank did not say anything about the mounting losses until the U.S. in January 2009 provided the bank with an additional $20 billion to absorb Merrill.
"We believe bank management understated the Merrill Lynch losses to shareholders to get shareholders to approve the deal then overstated their ability to terminate the agreement to get $20 billion from federal government," Cuomo said on a conference call.
After the shareholder vote, Bank of America executives went to U.S. officials and said they might back away from the purchase because the losses were greater than they expected. But the attorney general said Wednesday that "actual losses" were only $1.4 billion greater than at the time of the vote. "That is just a fraud," he said.
The bank, in a statement Thursday, called the charges "regrettable" and disappointing and said it would vigorously defend against them. The bank and Lewis and Price "at all times acted in good faith and consistent with their legal and fiduciary obligations."
Bank officials have maintained that they followed the advice of counsel in deciding whether to disclose losses prior to the vote, and that pre-vote losses were not high enough to reveal. The loss projections accelerated in the week after the vote and that is what caused the bank to consider withdrawing from the purchase, officials have said.
Lewis was CEO during the talks with the government; he left the bank at the end of 2009. Price, who was CFO during the talks, recently moved to become president of the bank's consumer operations.
Cuomo said bank executives "exploited" the economic fear that existed in late 2008 and "defrauded" taxpayers at a "very difficult and sensitive time."
Separately, the bank and the Securities and Exchange Commission have reached a $150 million settlement on allegations of misleading investors during the Merrill deal. The settlement requires a judge's approval.