As has been well-publicized, within a matter of weeks of closing its acquisition of Merrill Lynch, Bank of America announced previously undisclosed 4Q08 operating losses at Merrill of $21.5 billion that required BofA to obtain an emergency $20 billion cash injection from the U.S. Treasury, as well as an additional $118 billion asset backstop. BofA’s stock market valuation has dropped more $100 billion since the day before the merger was announced through the company’s January 16 earnings release.
As the Wall Street Journal reported (here), questions immediately arose following BofA’s announcement of the Merrill losses, such as why BofA’s CEO Kenneth Lewis "didn’t discover the problems prior to the Sept. 15 deal announcement" and "why he didn’t disclose the losses prior to the vote on the Merrill deal on Dec. 5 or before closing the deal on Jan. 1."
With these kinds of questions circulating, it comes as no surprise that plaintiffs’ attorneys have initiated litigation. There were actually two different lawsuits announced on January 21, 2009 relating to these circumstances. Both of the lawsuits purport to be filed on behalf of persons who held BofA securities on October 10, 2008, the record date for the December 5, 2008 special meeting of shareholders to approve the merger.
The first of these two lawsuits was filed in the Southern District of New York, as described in the plaintiffs’ lawyers’ January 21 press release (here). The second was filed in the Northern District of Georgia, as described a separate January 21 press release (here). The complaint in the N.D.Ga. action can be found here.
Both complaints name as defendants Bank of America and certain of its directors and officers. The S.D.N.Y. action also names Merrill’s CEO John Thain as a defendant as well. Both lawsuits allege that the defendants made materially false and misleading statements in the proxy materials in order to secure sufficient proxies to approve the merger. The defendants are alleged to have known that excessive losses at Merrill should have been disclosed to allow shareholders a well-informed vote on the merger.
Of all the interesting issues surrounding these circumstances, the most significant is the question of when BofA became aware of the magnitude of Merrill’s losses. (A related question is when Merrill became aware of the losses, but don’t expect any Merrill shareholders to raise the concern, as the completion of the merger was clearly in their best interest.)
The Journal article linked above reports that BofA now asserts that it learned of the magnitude of Merrill’s losses after the Dec. 5 shareholder vote, and that by Dec. 17, Lewis was so alarmed by the losses, which he reportedly characterized as "monstrous," that he traveled to Washington for an emergency meeting with Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson.
What happened at this Dec. 17 meeting presents its own interesting set of issues. Paulson and Bernanke apparently told Lewis that, according to the Journal, "failing to complete the Merrill acquisition would be disastrous" and would "further destabilize markets" and "hurt the bank" and potentially set off a "ripple effect that would exacerbate a fragile situation." The government officials also promised Lewis the backstop protection if the losses proved to be as significant as Lewis feared.
The meeting raises a host of questions, as discussed in the January 20, 2009 Wall Street Journal article entitled "BofA’s Merrill Deal Exposes Myth of Transparency" (here). The article suggests that "by most any reasonable measure, if the Merrill losses were concrete enough to seek a government lifeline, they were concrete enough to report to the company’s shareholders." The question is whether Lewis kept mum about the losses and the promised lifeline at Bernanke and Paulson’s request; the article asks whether perhaps the government was "complicit in nondisclosure."
While there may have been a marketplace interest in keeping the deal on track, there is no existing law that would relieve the company of its disclosure duties for the benefit of larger marketplace interests. The January 20 Journal article raises the question whether "a new legal standard could eventually emerge, sort of a ‘national interest’ doctrine absolving companies of governance actions that may be potentially harmful, but are important to an economic or defense emergency."
These are interesting questions. However, it should be noted that they arguably are irrelevant to the recently filed lawsuits, as the December 17 meeting took place well after the December 5 shareholder vote. There is of course always the possibility of a separate lawsuit on behalf of persons who acquired BofA shares, for example, between the December 17 meeting and before the company’s recent announcement of the Merrill-related losses. UPDATE: In the day immediately after I added this post, additional lawsuits came flooding in, including at least one (here) that is filed against, among others, a subclass of claimants who purchased Bank of America securities between January 2, 2009 and January 16, 2009.
Regardless whether or not other lawsuits in fact emerge, two questions will be paramount: when did the magnitude of the Merrill losses become apparent, and when did BofA have a duty to disclose this information to its shareholders?
Whatever else might be said about these circumstances, the certainly do underscore the magnitude of the problems confronting the economic and banking systems, as well as the challenges facing the incoming administration as it struggles to address these problems while taking up the reins of government.
These circumstances also raise serious questions about whether or not there are or should be exceptions to the transparency principles on which our entire system of securities and market regulation is based. It doesn’t require much imagination to picture the bedlam that could have ensued if the Merrill deal had fallen apart just before Christmas. The system can ill afford any more of the kind of chaos that enveloped the markets in September and October last year.
On the other hand, BofA’s shareholders might well feel that any analysis concluding that information was properly withheld from them for the sake of the overall market improperly negates their rights and expectations as shareholders.
It may or may not get addressed in a court in connection with the litigation involving the Merrill deal, but the question whether or not there is "national interest" exception to the standard disclosure principles is surely a very interesting question.
Professor Larry Ribstein discusses the question whether there is a national interest exception to the securities laws in his Ideoblog, here.
I have in any event added the Bank of America/Merrill Lynch litigation to my running tally of the subprime and credit crisis-related securities lawsuits, which can be accessed here. With the addition of this new litigation, the current tally of these cases now stands at 146, of which five have been filed in 2009.
More Madoff Litigation: The Madoff-related litigation wave has also continued to roll on. For example, on January 21, 2009, plaintiffs’ lawyers announced (here) that they had initiated a class action lawsuit in the Southern District of New York on behalf of persons who purchased between 2003 and the present variable universal life insurance issued by Tremont International Insurance Limited or Argus International Bermuda Limited.
The complaint (which can be found here) alleges that the insurer, an entity owned by Tremont Capital Management had breached its duties by offering Tremont-related funds as investment options for the variable investment account component of the policies. The complaint further alleges that the Tremont-related funds were heavily invested in Madoff funds.
The complaint alleges that the defendants violated a number of legal duties. The complaint does not, however, assert a violation of the federal securities laws. As a result I have included in the list of "other" litigation in my table of the Madoff-related litigation, which can be accessed here.
This latest lawsuit not only demonstrates that the Madoff litigation continues to roll in. It also shows what an incredible diversity of individuals and investors were harmed by losses from Madoff’s fraudulent scheme. It also shows how incredibly complicated it all is going to be to unwind this whole mess.
And Finally: Readers who registered the question posed on my preceding blog post whether President Obama had completed the oath of office as required by the Constitution will be relieved to know that the issue has been resolved.
On the apparent theory that there is nothing in the Constitution against do overs, Obama and Chief Justice reprised their roles in another rendition of the oath of office in a considerably less formal ceremony at the White House on the evening of January 21, 2009, as reported here.
That certainly is a load off my mind.