The multibillion-dollar settlement Bank of America announced Friday would resolve one of the most dramatic lawsuits to engulf the Charlotte bank after the financial crisis. It also will likely help propel the bank to a significant third-quarter loss.
The bank said Friday that it has agreed to pay $2.43 billion to settle a shareholder suit alleging the bank misled investors about the cost of acquiring Merrill Lynch.
“Resolving this litigation removes uncertainty and risk and is in the best interests of our shareholders,” CEO Brian Moynihan said in a statement. “As we work to put these long-standing issues behind us, our primary focus is on the future and serving our customers and clients.”
The lawsuit, which also named then-CEO Ken Lewis and then-Chief Financial Officer Joe Price, came after Bank of America acknowledged ballooning losses at Merrill Lynch just months after the bank announced it would acquire the investment bank in a $50 billion deal.
The suit alleged that Lewis and other officers withheld information about the losses from shareholders before they voted on the deal.
The settlement – the largest of its kind, according to lawyers involved – must still be approved by a federal judge in New York.
The money would mainly flow to pension funds that brought the suit, including the teachers and public employees retirement funds in Ohio, and their attorneys.
“Not only did we accomplish an excellent financial recovery, but other companies will look at the result here and think twice about not fully disclosing all necessary information to their shareholders,” Ohio Attorney General Mike DeWine said in a statement.
Bank of America announced it would acquire Merrill Lynch in September 2008. At the time, it projected no losses for Merrill in the current quarter, and told shareholders the deal would break even within two years.
As the financial crisis unfolded, extreme market volatility helped sap the investment bank’s liquidity. Bank of America executives discussed mounting losses through November, and by Dec. 3, Lewis was aware of a potential $16 billion in losses, the lawsuit stated.
Loss information withheld
Bank executives did not tell shareholders about the losses at the Dec. 5 meeting to approve the deal. They were disclosed about a month later.
Then-general counsel Tim Mayopoulos testified that he wasn’t informed of the Merrill losses until Dec. 9. He was fired and promptly escorted from the building the next morning, according to the lawsuit.
In sworn testimony released in court documents filed in June, Lewis admitted to knowing of the losses, but was advised by Price and outside attorneys from Wachtell, Lipton, Rosen & Katz not to disclose them.
Bank of America’s stock price, which had reached higher than $39 in September 2008, plunged as low as $3 by March 2009.
The lawsuit was filed in 2009 and received class-action status this year. It was scheduled to go to trial Oct. 22.
William Jeffras, an attorney representing Price in the lawsuit, said neither Price nor his legal team would have any comment on the settlement.
An attorney for Lewis declined comment as well.
Expected to affect earnings
The settlement is expected to make a significant dent in the bank’s third-quarter earnings, to be released Oct. 17.
This settlement alone is expected to add an extra $1.6 billion in expenses. It will combine with accounting charges related to the market value of the bank’s debt and a tax hit from a U.K. policy change to knock 28 cents per share off the bank’s earnings, the bank disclosed Friday.
The analyst consensus had been that Bank of America would earn about 14 cents per share. That will now probably have to be revised into the red.
But the settlement also helps continue to clear up legal issues that have plagued the bank for years.
Most have involved the fallout from the mortgage crisis, including the bank’s $11.8 billion commitment toward the $25 billion mortgage servicing settlement announced earlier this year with state attorneys general and federal agencies.
“It’s another round in the ongoing litigation saga, that’s for sure,” Barclays analyst Jason Goldberg said. “It’s another step closer to ending the legal excitement.”
Bank of America shares closed down more than 1.5 percent Friday, at $8.83.
A similar case is still pending against Bank of America in a Delaware court. The bank announced earlier this year a $20 million settlement to resolve those separate claims in New York and Delaware.
The Delaware plaintiffs have voiced their opposition to the settlement, calling it too small. A “fairness” hearing will be held in January on that issue.
Friday’s much larger settlement will follow a similar track. It must receive preliminary approval from a judge and withstand a fairness hearing before being finalized.