Bank of America officers could face charges over Merrill merger

Bank of America is told that it cannot use attorney-client privilege to withhold information about why BoA shareholders didn't receive material disclosures regarding Merrill's situation.

Attorney General Andrew Cuomo's office in New York has once again requested information from Bank of America regarding the Merrill Lynch merger, saying it is making decisions whether to charge BoA staff and cannot rely on BoA assertions that it acted on the advice of counsel. This time Cuomo's office has written to BoA's external counsel to make its case.

BoA "is improperly using the attorney-client privilege as both a sword and a shield in defending each of its failures to disclose material information to its shareholders", said David Markowitz, bureau chief, investor protection bureau, in a letter addressed to BoA's attorneys Cleary Gottlieb Steen & Hamilton.
The letter, which was sent on Tuesday, goes on to detail "at least four instances" in the fourth quarter of 2008 when BoA did not disclose material non-public information to its shareholders.
BoA did not tell its shareholders about Merrill's $11 billion of forecast losses and about a further $3 billion contingency, which BoA became aware of in December. Timothy Mayopoulos, who was then BoA general counsel as well as external counsel, advised BoA's chief financial officer, Joseph Price, not to disclose these losses. BoA has maintained that it became concerned about Merrill's mounting losses after BoA shareholders had voted in favour of the merger proposal. Price and Mayopoulos have been instructed by Cleary Gottlieb that any conversations related to the decision not to disclose information are governed by attorney-client privilege.
Merrill knew in November 2008 that it needed to take a goodwill charge on its 2006 acquisition of First Franklin Financial Corporation, an originator of subprime residential loans. The write-down of $2 billion was included in Merrill's January financials, one month after BoA shareholders had voted in favour of the merger.
Eight days after BoA shareholders approved the merger, BoA's chief executive Kenneth Lewis and Price told senior officials at the US Treasury department and the Federal Reserve that Merrill's increasing losses, then standing at $18 billion, gave BoA the right to terminate the merger. Lewis has said under oath that the Merrill losses will adversely impact BoA's shareholders for two to three years. When asked by Cuomo's office whether he had considered disclosing these facts to BoA shareholders, Lewis replied that disclosure was not up to him and his decisions not to disclose were based on direction from then Treasury secretary Hank Paulson and Fed chairman Ben Bernanke. To the US Congress Lewis said that the decision of whether to disclose was left to lawyers.

The $3.6 billion of bonuses that BoA allowed Merrill to pay its employees for 2008 has already been publicised extensively and has raised questions about bonus practices across Wall Street. This is the fourth instance the letter cites in which BoA shareholders were not consulted, or even, informed. In March, Cuomo demanded to know the names of Merrill employees who received bonuses in excess of $1 million.

BoA knew in November about Merrill's decision to accelerate bonus payments and that it would decide on the amounts in December. Merrill has historically paid bonuses, based on annual performance, in January, in line with many other investment banks. Neither BoA nor Merrill disclosed to shareholders the decision to deviate from this historical practice. "Nor did they disclose the fact that they would in fact conveniently abandon the [pay for performance] practice when they faced losses, instead setting the bonus pool according to what an outside consultant estimated Merrill's more successful competitors would be paying, and accelerating the cash payment to before year-end," Markowitz said in the letter.

BoA has justified the non-disclosure to shareholders on the grounds that external law firms provided proxy advice. However, Cuomo's office alleges that it has been unable to establish whether the law firms were asked any questions vital to the decision not to disclose, as BoA has cited privilege.

"We simply cannot accept BoA's officers' bald assertions that their decision to keep each of these events from BoA's shareholders was based on a full review of all the relevant information by their inside and outside counsel," said Markowitz. Cuomo's office is giving BoA a "final opportunity to reconsider" its stance and will otherwise proceed to charge individual BoA officers.

Cuomo's office already raised many of the above issues in April. However, this time his office has written to BoA's lawyers and added the threat of legal charges.

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