Bank of America Still Being Punished for Merrill Lynch Merger
Summary: Bank of America is currently locked in a legal battle with the SEC over information disclosure issues stemming from the period before its merger with Merrill Lynch.
In late 2008, the Bank of America Corporation purchased Merrill Lynch in a $50 billion merger to save the sinking giant. Since the buy-out, a storm of legal controversy has surrounded the deal and upset many entities, including the Securities and Exchange Commission, federal lawmakers, BOA shareholders and the general public. In addition to government hearings, state investigations, shareholder lawsuits and media mud-slinging BOA has met with over the last year, it is currently locked in a legal battle with the SEC over information disclosure issues stemming from the pre-merger period.
SEC v. BOA
Since the SEC filed charges against BOA in August of last year, the case has gotten more complex and intense. According to litigation releases issued by the SEC, the initial claim alleged that BOA violated federal proxy rules. The SEC says this violation occurred when BOA failed to inform shareholders that it had authorized Merrill to pay up to $5.8 billion in bonuses at the time of the merger. In fact, the SEC found that BOA revealed Merrill’s agreement not to give bonuses in materials sent to shareholders prior to their vote on the acquisition. The shareholders eventually approved the merger, but did not know about the Merrill bonuses until everything was finalized.
The SEC and BOA originally agreed to settle the lawsuit for $33 million. This settlement was subject to court approval, however, and U.S. District Court Judge Jed S. Rakoff rejected it, citing various reasons for his opposition. Among them were that it was unfair and inadequate, there were no executives named in the suit, it seemed like the SEC was being too soft on such a large corporation, and BOA was not taking responsibility for its actions or sharing the truth with its investors or the public. The trial is currently set for March of this year.
In general, shareholders have the right to sue a corporation, its officers and directors and other related parties to protect their ownership. Shareholder lawsuits may be direct or derivative. Direct lawsuits typically concern issues like contract rights regarding the shares, statutory shareholder rights, rights to recover dividends and rights to review corporate accounting books and records. Derivative lawsuits are those in which shareholders sue to protect the interests of the corporation, on behalf of the corporation. The purpose of these actions is typically to prevent officer or director misconduct, or to attempt recovery for their wrongdoing. Last year BOA shareholders brought both direct and derivative lawsuits against the corporation for violating securities laws, for example the Securities Exchange Act of 1934, the breach of fiduciary duties, and non-compliance with the Employee Retirement Income and Security Act.
The multiple consolidated class action lawsuits that shareholders filed named BOA, Merrill and other individual parties, including former CEO’s Ken Lewis and John Thain, as defendants. The shareholders claim, among other things, that the companies misrepresented information about bonus payments and substantial losses during the merger process. Late last year BOA and other defendants tried to persuade a federal judge to dismiss the lawsuit, but this decision is still pending. Critics argue that BOA shareholders are attempting to take advantage of the situation in a down economy and they should have guessed at this information before submitting their votes on the merger. Regardless of opinion, the companies are improving and the shareholders stand to eventually profit from the merger overall.
For many reasons, the SEC’s suit against BOA has maintained its controversial edge, and even the federal government has been negatively linked to the dispute. Ken Lewis, then the CEO of BOA, claimed during his congressional hearing testimony that the chairman of the Federal Reserve, Ben Bernanke, and the secretary of the Treasury at the time, Henry Paulson, pushed him to stick with the Merrill merger and advised him not to disclose the extent of Merrill’s poor economic state to the media or to shareholders. In exchange, BOA received billions more in federal bailout money. In total, BOA borrowed $45 billion from the taxpayers, which it is currently attempting to pay back. This may help BOA’s bounce-back in the public eye, but the outcome of its SEC trial, and marked improvement in shareholder confidence, remain to be seen.