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BofA's Growing Legal Woes Could Bring Shakeup at Top

Published: Monday, 21 Sep 2009 | 5:31 PM ET

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By: CNBC.com with Reuters

Bank of America CEO Ken Lewis has survived troubled acquisitions, massive credit losses and two government bailouts, but experts question whether he can survive a series of investigations.
AP
Ken Lewis

Lewis and other senior bank executives face intense scrutiny from regulators, state attorneys general and Congress over whether they failed to disclose key information about Merrill Lynch's financial health and bonus plans before Bank of America bought the brokerage.

"It comes to a point that the company is so completely distracted by the legal fight it can't focus on the business," said Tony Plath, banking professor at UNC-Charlotte who follows the bank closely. "This is becoming a significant impediment to management's job."

A Bank of America [BAC Loading... () ] spokesman said the board fully supports Lewis, but did not elaborate further. At a Monday meeting, the bank's directors were expected to discuss legal options if he is charged with civil fraud, The Wall Street Journal said.

In the latest in a series of investigations and lawsuits, the Securities and Exchange Commission said Monday that it will "vigorously pursue" its case that Bank of America violated federal securities laws. The SEC says Bank of America failed to provide investors with complete and accurate information about the bonuses to be paid by Merrill Lynch to employees.

"We will use the additional discovery available in the litigation to further pursue the facts and determine whether to seek the court's permission to bring additional charges in this case," the SEC said in a statement.

A House of Representatives panel gave the bank until noon Monday to provide additional information about its purchase of Merrill Lynch—a deadline that Bank of America missed.

The World's Safest Banks

The panel said the bank cannot use attorney-client privilege to withhold details of the deal from Congress.

Bank of America released this statement to CNBC Monday afternoon on the investigation:

"We are working with the committee on a plan to provide them with the information they need. Anne Finucane, a member of our executive management team, will meet with Congressman Towns tomorrow to discuss how we can meet their needs without violating attorney-client privilege."

And New York Attorney General Andrew Cuomo's office is considering filing civil charges against Lewis, Whatever Cuomo and other investigators decide, legal issues can drag on for years, and companies often cut ties with executives to minimize such distractions, according to corporate governance experts.

"Whether a management change happens depends on the size of the distraction," said Karen Brenner, a business professor at New York University specializing in ethics and corporate governance. "Legal issues can ebb and flow, but the company is dealing with a great deal of pressure now."

Brenner said while it is early to assume the pending legal issues will quickly force wholesale management change, such changes are not unprecedented.

Some investors are already getting restless. Michael Nix, co-chief investment officer for Greenwood, South Carolina-based Greenwood Capital Associates, said the firm is considering selling its 100,000 Bank of America shares because of short-term performance and long-term litigation worries.

Bank Failures in 2008

"We'll still be talking about these lawsuits three to five years from now," Nix said. "A lot of people will get pulled into this thing."

Bank of America shares were down 2 percent at $17.28 in Monday afternoon trading.

Abrupt Ends

For chief executives embroiled in corporate and legal turmoil, tenure can end quickly. In a matter of weeks, Ken Thompson went from holding Wachovia's [WB Loading... () ] two top positions to being ousted altogether.

He lost the chairmanship in May 2008 and was let go as CEO the next month. The then-board cited a series of missteps, including the ill-timed purchase of Golden West Financial.

Lewis has made his share of missteps, too. His purchases of Countrywide Financial and Merrill Lynch have created big headaches for the bank, even if they pay off in the long run. The bank has been bailed out twice by the government, more than any other U.S. bank apart from Citigroup [C Loading... () ].

A Deal Gone Bad

On Sept. 15, 2008, Lewis called the accord to buy Merrill Lynch a "great opportunity for our shareholders." A year later, the bank's stock is down 55 percent from its 52-week high of $39.50, which it hit on Sept. 18, 2008.

The World's Best Banks 2009

U.S. Judge Jed Rakoff has rejected a proposed $33 million settlement between Bank of America and the Securities and Exchange Commission to resolve allegations the bank failed to properly disclose its control over $3 billion in bonus payments Merrill Lynch made to employees before the deal closed on Jan. 1 this year.