Former Bank of America Corp. CEO Ken Lewis shouldnt be held accountable for the banks failure to tell shareholders of ballooning losses at Merrill Lynch ahead of its acquisition by the Charlotte bank, attorneys for the former chief executive argue.
According to Lewis attorneys, thats because Lewis was told by one of his lieutenants and Bank of America lawyers that it wasnt necessary, as stated in documents filed in a shareholder suit Sunday.
The filings came the same day that shareholders revealed sworn testimony from Lewis that he knew of more losses at the struggling investment bank than were publicly disclosed before a shareholder vote to approve the merger.
He did precisely what the CEO of a large enterprise should have done when faced with the prospect of large interim and forecasted losses at Merrill, by talking to his lieutenant and to bank attorneys who told him disclosure wasnt necessary, his attorneys wrote.
Mr. Lewis, who, like most CEOs, is a non-lawyer not steeped in the securities laws, did not overrule that determination and had absolutely no basis for doing so.
The lawsuit stems from a harried September 2008 weekend at the height of the financial crisis in which Bank of America hammered out a deal with Merrill Lynch to acquire the iconic Wall Street firm. This became one of the prime dramas in the fallout that followed, involving multiple investigations and congressional hearings that targeted some of Charlottes pre-eminent figures.
The deal was announced Sept. 15, 2008. At the time, Bank of America projected no losses at Merrill Lynch for the fourth quarter and said the deal would break even for shareholders by 2010.
But as the stock market was roiled by record-breaking daily declines, Merrill Lynch losses zapped its liquidity and forced it to the brink of collapse.
In Charlotte, executives traded messages worried about the accelerating losses through November, and Lewis was told of losses reaching $16 billion by Dec. 3.
But the bank did not update shareholders on the losses in advance of the Dec. 5 meeting to vote on the deal. They were informed of the losses the next month the key driver of a lawsuit filed by shareholders in 2009. It was granted class-action status this year.
Lewis attorneys argue that he acted on the advice of then-Chief Financial Officer Joe Price and outside attorneys from Wachtell, Lipton, Rosen & Katz, who told him disclosure of interim projections was not necessary.
They reportedly told Lewis, according to his attorneys, that existing disclosures said Merrill Lynchs performance could be affected by the economic turmoil and that the projected losses were not out of line with losses the investment bank had previously suffered.
Mr. Lewis was aware of no red flags suggesting the considered judgment of these professionals was incorrect, based on inadequate information or should be questioned for any reason, Sundays filing states.
While saying that the issues are likely to continue closer to a jury trial, St. Johns University professor and securities litigator Anthony Sabino said Lewis offered a common defense.
Its a very common defense because its a valid defense, he said. Its a valid defense to say, I relied on expert advice.
Lewis, Price and Bank of America have separate attorneys in the litigation. In such corporate lawsuits, the company typically picks up the cost of legal representations for former officers.
The majority of the executives involved in the decision have since left the bank. Lewis retired at the end of 2009 and was replaced by current CEO Brian Moynihan.
Price stayed on as Moynihans head of consumer banking until September, when he left in a management shakeup.
Prices attorneys also filed motions Sunday, but they deal primarily with a separate part of the lawsuit dealing with bonuses paid to Merrill Lynch employees. The filing states that the issue of loss disclosure should be left for trial.
Many of the allegations by Bank of America shareholders in Sundays filings mirror those brought in a suit by then-New York Attorney General Andrew Cuomo in 2010.
In that suit, Lewis struck a more defiant tone in his response to prosecutors.
Some have looked to assign blame for every aspect of the financial crisis, even where there is no evidence of misconduct, Lewis attorney wrote in a filing. This case is a product of that dynamic and does not withstand either legal or factual scrutiny.
Prices attorneys also defended their client in that suit against allegations that he should have pushed for disclosure of the additional losses.
(Price) recognized that the losses presented a legal issue of whether public disclosure should be made in advance of the shareholder vote on the merger, a filing states. He consulted inside and outside counsel for the bank, provided them all information needed or requested by them, and followed their advice.
That lawsuit is still pending.