Bank of America Corp. chief executive Ken Lewis won the support of his board this week, but his troubled Merrill Lynch & Co. acquisition continues to attract shareholder lawsuits and the increased scrutiny of New York Attorney General Andrew Cuomo.
A law firm known for winning billions for shareholders in litigation against Enron Corp. filed a class-action lawsuit Friday in New York federal court, alleging the Charlotte bank misled shareholders by concealing Merrill's troubles and the company's need for additional government assistance until weeks after the deal closed.
At least a half dozen suits have now been filed on behalf of shareholders who have seen their holdings fall about 80 percent since the Merrill deal was announced in mid-September. Bank of America shares drooped nearly 3 percent Friday to close at $6.58.
Separately, Cuomo is reportedly investigating whether shareholders were properly informed about Merrill's finances, widening a probe into bonuses paid by Merrill before the deal closed. Cuomo's office did not return calls seeking comment. The bank has declined to comment on the probe and shareholder lawsuits.
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At issue is the timing of Bank of America's discovery of Merrill's mounting fourth-quarter woes and the failure to disclose these problems until Jan. 16. Shareholders approved the deal Dec. 5, and the purchase officially closed Jan. 1.
“Bank of America is facing a serious dilemma,” analyst Dick Bove of Ladenburg Thalmann & Co. wrote in a research note this week. “If the company argues that it did not know that Merrill Lynch's losses could be in the multi-billions in the fourth quarter, it is indicating that management is incompetent. If it admits it was well aware of the problems at Merrill but just did not disclose them, it is admitting that it allowed material information to be withheld from investors.”
Lewis has said Bank of America learned about problems with the deal in mid-December after the shareholder vote and before the deal closed.
On Dec. 17, he flew to Washington to meet with Federal Reserve Chairman Ben Bernanke and then-Treasury Secretary Henry Paulson. Lewis said the bank was looking at its rights to back out of the deal. But the “the government was firmly of the view that terminating or delaying the close of the transaction could lead to significant concern and could result in serious systemic harm,” Lewis said.
Renegotiating the price was also a problem because it would require new shareholder votes and a delay in the close, which also could provide an unwelcome jolt to the financial system. In recognition of this dilemma, the officials offered to provide the bank with assistance, Lewis said.
Taking all this into consideration, “we thought it was in the best interest of our company and our stockholders to move forward with the original terms and timing,” he said.
On Jan. 16, the government confirmed it was providing Bank of America with an extra $20 billion in capital and additional protection against loan losses. On the same day, the bank said it lost $2.4 billion in the fourth quarter, while Merrill's red ink topped $15 billion.
A week later, Lewis flew to New York to accept the resignation of former Merrill CEO John Thain, who had stayed on in a top post at the combined company.
The lawsuit filed Friday by the law firm of Coughlin Stoia Geller Rudman & Robbins seeks to represent shareholders who bought the bank's stock between July 21 and Jan. 20. The suit, filed on behalf of shareholder Charles Zitner, alleges Bank of America, Lewis, Thain and Bank of America chief financial officer Joe Price “issued materially false and misleading statements regarding the company's business and financial results.”
While knowing of Merrill's losses, the bank continued to issue statements that emphasized the success of the transaction, the suit states. “We created this new organization because we believe that wealth management and corporate and investment banking represent significant growth opportunities, especially when combined with our leading capabilities in consumer and commercial banking,” Lewis said in a statement issued the day the deal closed.
Other lawsuits filed against the company allege that filings by the company were misleading and deprived shareholders of making an informed vote.
Meanwhile, Cuomo's probe started with an investigation of Merrill bonuses paid out before the deal closed. He has subpoenaed Thain and Bank of America chief administrative officer Steele Alphin, a close confidant of Lewis' who heads human resources at the bank. Cuomo wants to know what Lewis knew about the bonuses, estimated at $4 billion, and about Merrill's surprise loss, Bloomberg News reported this week, citing a person familiar with the matter.
Inside the bank, the Merrill takeover continues to brew discontent among employees who are losing their jobs in merger-related cutbacks, even as Merrill counterparts receive bonuses. On Friday, some employees who have lost their jobs in recent weeks learned they won't receive bonuses for their 2008 work, a source familiar with the situation said. Instead, they will only receive severance that amounts to two weeks base pay for every year served.
Bank of America employees who haven't lost their jobs will receive dramatically slashed bonuses, or deferred payouts. Bonuses under $50,000 will be paid this year, while bigger payouts will be stretched out, the source said.
While Wall Street bonuses have come under fire from investors, lawmakers and even President Obama, the source noted that the bonuses account for a big chunk of employees' income and were a major boon to the Charlotte economy in good times.
Bank of America said it doesn't comment on compensation plans.
The bank's problems have piled investor ire on Lewis, but lead director Temple Sloan Jr. issued a statement after Wednesday's regular meeting expressing the board's support for the CEO and his management team.
A cloud will continue to hang over Lewis and the bank, though, as more revelations emerge about the Merrill deal, Morningstar analyst Jaime Peters said. The bank faces questions about whether it needs more capital and whether the government will create a “bad bank” to help absorb its toxic assets, she said. Shareholder holdings have been diluted from the injection of government capital, and the company's earnings power has been weakened, she added.
“The bank made a series of bad decisions in 2008 as it tried to take advantage of the credit crisis and grow quickly,” she said. “Ken Lewis' insatiable appetite for acquisitions has finally gotten the best of them.”