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Today's Top News
Bank of America's Ken Lewis Faces Fraud Lawsuit
The New York attorney general yesterday accused Bank of America Corp. and its former chief executive, Kenneth Lewis, of deceiving shareholders and manipulating US officials during the company's $50 billion purchase of Merrill Lynch.
Lewis's successor, Brian Moynihan of Wellesley, who was involved in negotiations as the bank's general counsel, was not charged.
However, the lawsuit suggests that in December 2008, Moynihan, Lewis, and Joseph Price, the former chief financial officer, strategized how to get federal money to cover Merrill's mounting losses.
"Lewis and his lieutenants Moynihan and Price calculated that if they threatened'' to invoke a legal clause to back out of purchasing Merrill, "the federal government would counter with more taxpayer funds out of a concern for the greater economy,'' the lawsuit, filed by Attorney General Andrew Cuomo in New York state court, said.
Cuomo's office yesterday said Moynihan was not under investigation. The lawsuit also does not charge any Bank of America directors, several of whom are prominent Boston executives.
The bank and the executives issued statements defending their actions and calling the lawsuit unfounded.
The civil fraud charges against Lewis, Price, and the company itself concern a series of rapidly unfolding events from September 2008, when the financial industry pitched into crisis, to January 2009, when Bank of America ultimately received $20 billion in government money to cover Merrill's losses. Bank of America had previously received $25 billion from the government.
The underlying question is whether bank executives gave shareholders an accurate accounting of Merrill's weakening financial condition when they voted to approve its purchase on Dec. 5, 2008.
In the days leading to the vote, regulators contend, Bank of America officials learned Merrill's condition was rapidly deteriorating and were required to notify shareholders, but didn't. Had they done so, shareholders might have rejected the purchase of Merrill, a company Lewis had long coveted.
After shareholders approved the purchase, bank executives realized they had misread Merrill's condition, the lawsuit contends. So they launched a campaign to get taxpayers to bail them out by threatening US officials with canceling the deal - something federal regulators feared would have a dangerously unsettling effect on Wall Street.
The lawsuit contained excerpts from bank documents, records of meetings and conversations, and e-mails that also reveal the chaos of the times, when the financial system was in near panic from a growing credit crisis that toppled some of Wall Street's most storied institutions.
Cuomo, in his lawsuit, also said Bank of America rushed through its review of Merrill's books the weekend it decided to buy the investment firm. In fact, bank directors believed Bank of America was buying a different company altogether when they met Sunday, Sept. 15, 2008.
Cuomo quotes bank director and NStar chief executive Thomas May as being "surprised'' to learn, arriving at the meeting, that the company was acquiring Merrill Lynch instead of Lehman Brothers Holdings Inc.
Cuomo also quoted from an e-mail that bank director and former FleetBoston Financial chief executive Charles Gifford wrote to a colleague several months later complaining, "it's the way we approve acquisitions that tick me off the most.''
Yesterday Lewis, through his attorney, called Cuomo's lawsuit baseless.
"Lewis has been unfairly vilified by the political search for accountability for the financial meltdown,'' said Mary Jo White of Debevoise & Plimpton LLP. "This suit is not fair, it is without factual or legal basis.''
Price's attorney said his client, who now works in another top position at Bank of America, properly raised concerns about Merrill's losses and then followed advice from the bank lawyers. "He did exactly what a responsible regulator would want and expect from a chief financial officer,'' said lawyer William Jeffress Jr. of Baker Botts.
Bank of America spokesman James Mahoney said Cuomo misinterpreted events, that bank executives were merely warning US officials about their thinking on Merrill, and that it was the government's idea to provide the additional money to help with Merrill's losses.
"There was no scheme to defraud the government,'' Mahoney said. "On the contrary, there was a joint effort with the government to avoid a catastrophic failure of the financial system.''
Lewis abruptly announced last fall that he would retire ahead of schedule, and directors in December selected Moynihan as his replacement.
Cuomo yesterday said Moynihan was not a target because he worked in another position, hadn't been involved in most of the Merrill matter, and wasn't made general counsel until after shareholders approved the purchase.
"The charges filed today stem from the failure to disclose losses in connection with the December 5 shareholder vote and Mr. Moynihan did not have a role in that,'' Cuomo said. "Mr. Moynihan has been candid with our office with respect to the roles he played after becoming general counsel.''
Noting Cuomo's remarks, Mahoney, the bank spokesman, said the investigation cleared Moynihan. "Attorney general Cuomo's actions clearly put this Merrill Lynch matter in the past for Brian and position him to pursue his agenda for leading the company.''
The attorney general's case also focused on the days following the shareholder vote, recounting instances in which the executives raised the prospect of backing out unless Bank of America received government money and guarantees.
"This was an arrogant scheme hatched by the bank's top executives who believed they could play by their own set of rules,'' Cuomo said yesterday. "In the end, they committed an enormous fraud and American taxpayers ended up paying billions for Bank of America's misdeeds.''
As part of their defense, Lewis, Price, and the company pointedly noted that the Securities and Exchange Commission, investigating the same matter, declined to charge the two executives.
But Cuomo's lawsuit may instead serve to reprise complaints that the SEC has done a poor job of policing corporate America.
Just yesterday the SEC disclosed a new settlement with Bank of America, in which the company agreed to pay $150 million to shareholders for allegedly misleading them about Merrill's losses and bonuses paid to Merrill employees.
The SEC charged only the company with failing to make required disclosures, and no Bank of America employees.
Last September a federal judge in New York rejected a previous settlement for $33 million, in part because he said it did not hold any executives culpable.
In the wake of such things as the Bernard L. Madoff Ponzi scheme and the bubble in mortgage securities, the SEC's new leadership has pledged to be more aggressive and thorough.
Columbia Law School professor John C. Coffee said it's "unprecedented'' for Cuomo to sue Bank of America and two key executives, when the bank has already reached a settlement with the SEC. "This is an implied statement that the SEC has not done enough,'' said Coffee, the director of Columbia's Center on Corporate Governance.
An SEC spokesman declined to respond. Cuomo, meanwhile, praised the SEC's actions, but said his own course was necessary to "bring people to justice.''