Bank of America and two of its former chief executives offered last Friday flat-out denials of fraud charges related to the bank’s merger with Merrill Lynch. The bank, former CEO Kenneth Lewis, and former CFO Joe Price each filed paperwork with the New York Supreme Court in response to a lawsuit against the bank filed by the New York State Attorney General, Andrew Cuomo.Bank of America, the nation’s largest bank, merged with large brokerage Merrill Lynch in late 2008 at the height of the financial crisis. The merger, which fell in line with Bank of America’s practice of aggressive acquisitions, was a bit surprising considering how poorly the economy was performing at the time. The lawsuit alleged Bank of America misled its investors to convince them to approve the transaction and also accused the bank of relying on a taxpayer-funded bailout to help it carry the weight of struggling Merrill Lynch after the acquisition.
The Accusations
The Attorney General’s claim against Bank of America said that the bank misled its shareholders leading up to the merger by not disclosing the struggles Merrill Lynch was facing. Merrill Lynch was facing mounting losses but Bank of America shareholders still approved the deal for some reason. Once the company’s shareholders had signed off on the deal, Bank of America told the federal government it intended to back out of the deal through a contractual loophole. Instead, the bank held onto the brokerage firm and allegedly used billions of taxpayer dollars to prop up the expensive acquisition.
“The conduct of Bank of America, through its top management, was motivated by self-interest, greed, hubris, and a palpable sense that the normal rules of fair play did not apply to them,” reads the Cuomo’s lawsuit. “Bank of America’s management thought of itself as too big to play by the rules and, just as disturbingly, too big to tell the truth.”
The filing named Lews and former Bank of America CFO Joe Price specifically, claiming that the pair was at the top of the scheme to hide Merrill Lynch’s struggles from Bank of America shareholders. The companies worked out the merger between September and December 2008, with stockholders voting in early December. The shareholders did not discover Merrill Lynch’s staggering fourth quarter losses until January 2009. In fact, between September and the day shareholders voted to approve the merger, Merrill Lynch had lost $17 billion — $7.5 billion in October 2008 alone.
The Defense
Lewis, Price and Bank of America each offered official denials to the state’s lawsuit.
The bank’s response was a 61-page, point-by-point rundown (PDF) of why the state’s case against the bank would not stand up. The filing was no-frills and contested the claims made in every paragraph of the state’s initial accusations. Lewis and Price responded with documents stating their innocence against the state’s lawsuit. Lewis’ claim accuses the government of scapegoating everyone who was in the industry during the financial meltdown, placing blame at the feet of too many people. Price responded by claiming the merger actually helped the country’s economic recovery.
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