BofA Directors’ Merrill Settlement Flawed, Objectors Say

By Jef Feeley – Nov 28, 2012 2:52 AM ET

Bank of America Corp. directors’ $20 million settlement of investor lawsuits over the purchase of Merrill Lynch & Co. is inadequate given the billions of dollars of harm the deal caused, objectors to the accord said.

The proposed settlement amounts to 4 percent of the board’s $500 million of insurance coverage and less than 1 percent of the more than $2.4 billion Bank of America officials agreed to pay in September to resolve other investors’ securities-fraud claims over the Merrill Lynch deal, lawyers for the shareholders said in federal court filings in New York yesterday.

“The grossly inadequate $20 million value of the proposed settlement cannot be justified under any circumstances,” Paul Paradis, a New York-based lawyer for Bank of America investors who sued in Delaware claiming the bank overpaid for Merrill Lynch, said in the filing today. If the accord is approved, it could wipe out the Delaware claims.

A federal judge in Manhattan still must decide whether to approve Charlotte, North Carolina-based Bank of America’s $2.43 billion settlement of shareholder suits that claimed management hid Merrill losses ahead of the 2009 deal. The accord is separate from the $20 million settlement of so-called derivative claims against directors.

The shareholders claimed former Chief Executive Officer Kenneth D. Lewis and other board members misled them about the losses Merrill Lynch incurred before the $18.5 billion buyout and should have pulled the plug on the deal.

Bank of America spokesman Andrew Peck in Hong Kong referred inquiries about the filing to the bank’s New York office.

Merrill’s Losses

New York-based Merrill Lynch, founded by Charles E. Merrill in 1914, had at least $50 billion in losses and writedowns linked to the collapse of the U.S. subprime mortgage market before agreeing to be sold.

Bank of America officials said in earlier court filings they acquired Merrill Lynch at the behest of government officials concerned about the investment house’s subprime losses. The deal saddled the bank with losses and prompted regulators to provide $20 billion in bailout financing.

The filings in the shareholder suit against the directors include unsealed copies of internal e-mails from Brian Moynihan, Bank of America’ current CEO, indicating he was concerned the firm was overpaying for Merrill Lynch.

‘Paying Twice’

In a December 2008 e-mail, Moynihan complained the bank was “paying twice (so to speak) for Merrill once to ml shareholders and once to the govt by delivering them” shares. Moynihan was an executive overseeing the bank’s private equity and global operations units at the time, according to a Bloomberg Businessweek profile.

The filings also show that some Bank of America directors said they’d heard colleagues lay the blame for the Merrill Lynch debacle at Lewis’s door.

William Barnet III, a South Carolina businessman who stepped down from Bank of America’s board in July 2009, said in an e-mail “some feel Ken ego and ambition cause of all this,” in a reference to Lewis. The e-mail was sent to fellow director Chad Gifford in January of the same year. Gifford is still on the bank’s board, according to his Bloomberg profile.

Lewis, who as CEO spent more than $130 billion on takeovers, clashed with regulators including the Federal Reserve and then-Treasury Secretary Hank Paulson by trying to back out of the Merrill takeover over the brokerage firm’s deepening losses.

Under Pressure

Lewis went ahead with the deal under pressure, only to be stripped of his chairman’s title later in 2009 amid a shareholder revolt. That September, he announced plans to step down by year’s end without a successor in place.

Moynihan, who took over in 2010, has approved more than $28 billion for settlements of legal and regulatory claims tied to his predecessor’s takeovers of Countrywide Financial Corp. and Merrill Lynch.

Anthony Saunders, a New York University finance professor hired by shareholders to assess Bank of America’s losses from the Merrill Lynch buyout, found the lender suffered at least $5.9 billion in damages from the deal.

Included in those damages was a $150 million settlement in 2010 with the U.S. Securities & Exchange Commission over executives’ misstatements about the Merrill Lynch purchase, Saunders said in his 50-page report.

Bonus Payments

Federal regulators alleged Bank of America officials misled investors about Merrill Lynch’s bonus payments before the 2009 acquisition and failed to disclose the investment firms’ expected losses. The bank said in a November 2008 proxy statement that Merrill Lynch agreed not to pay year-end bonuses even though the bank had already backed Merrill’s plan to pay as much as $5.8 billion, according to the lawsuit.

“It is my expert opinion that the $150 million paid by BAC to the SEC in connection with the merger damaged BAC,” Saunders said.

Objectors to the board’s settlement of shareholders’ derivative claims are asking U.S. District Judge P. Kevin Castel to reject the $20 million accord and let them proceed with claims against Bank of America’s directors in state court in Delaware.

The Delaware investors want to press forward with their so- called derivative action, which would return any recovery from insurance covering directors to the bank’s coffers rather than to individual shareholders.

The New York case is In re Bank of America securities, derivative and employee retirement income securities act litigation, 09-02058, U.S. District Court, Southern District of New York (Manhattan.) The Delaware case is Nancy Rothbaum v. Kenneth D. Lewis, CA4307, Delaware Chancery Court (Wilmington).

To contact the reporter on this story: Jef Feeley in Wilmington, Delaware atjfeeley@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net