A series of legal setbacks is complicating Bank of America Corp.'s bid to rehabilitate its brand, regain momentum and tap into an economy that is showing early signs of resurgence.
"It is putting pains on the company at a time where it is seeing signs of strength," said Lawrence G. Baxter, a law professor at Duke University. "It certainly doesn't look good to keep dealing with these things one after another when you have an overall image problem."
The latest complication came Monday, when a judge rejected B of A's settlement with the Securities and Exchange Commission over a lack of disclosure related to the company's January purchase of Merrill Lynch & Co.
Baxter called it "pretty ominous" that Judge Jed Rakoff, a U.S. district Judge for the Southern District of New York, focused squarely on management, particularly CEO Kenneth D. Lewis. "There is no question that things have drifted in the direction of executives," he said. "If enforcers are looking to make examples of executives, it ought to send chills to a lot of companies."
Most acquisitions have a fair share of litigation, but in the case of B of A and Merrill, the hits keep coming.
Robert Clarke, a senior partner at Bracewell & Giuliani and former comptroller of the currency, said it could take a while for all the legal dust to settle for Bank of America and that more problems could follow. "Unfortunately, these types of issues can drag out for some time," he said. "Once you have a little blood in the water, people see an opportunity to pile it on."
Bank of America has been trying to work through some of those issues. Last month it agreed to pay $150 million to settle claims that Merrill misled investors about the sale of bonds and preferred stock. Final approval of that settlement is set for a Nov. 23 hearing.
And B of A disclosed in its second-quarter filing with the SEC that it inherited four major lawsuits from Merrill on matters that included auction-rate securities and dealings in subprime lending.
Robert McCann, who ran Merrill's brokerage operations, filed a lawsuit against B of A on Aug. 24 in New York State Supreme Court claiming it fired him without cause and had refused to release him from a noncompete clause.
Meanwhile, the office of New York Attorney General Andrew Cuomo is close to charging a group of top B of A executives over disclosure decisions. Last week David Markowitz, who leads the office's investor protection bureau, wrote in a letter to B of A's legal counsel that where at least four instances where material information was not shared with investors.
Timothy Yeager, a finance professor at the University of Arkansas and a former economist with the Federal Reserve Bank of St. Louis, said the multiple legal fronts are hitting B of A at an unfortunate time as it looks to integrate Merrill and repair its public image.
"Dealing with such crises is always messy," he said. Lingering legal issues will "make Bank of America's case for the acquisition that much more difficult."
"The biggest problem is the reputational risk that goes along with the litigation," he said. "Many people don't know about all the underlying aspects of the litigation, but they are forming [an] impression about the quality and the integrity of the company."
In rejecting the SEC's $33 million settlement Monday, Judge Rakoff questioned why the SEC declined to go after company executives in its settlement over claims that B of A "materially lied" to investors over bonuses for Merrill executives. Rakoff set a Feb. 1 trial date on the allegations.
In an e-mail, B of A spokesman Scott Silvestri said: "We disagree with today's ruling. Bank of America believes the facts demonstrate that proper disclosure was made to shareholders about Merrill bonuses. We are prepared to prove that through litigation. We will consider all our legal options over the coming days."