Mr. Price met with the bank’s general counsel, Timothy J. Mayopoulos, to discuss whether to disclose the loss — at the time about $5 billion — to Bank of America shareholders. Mr. Mayopoulos testified to the New York attorney general’s office that while his initial reaction was that disclosure was warranted, he decided against it. Merrill had been losing $2.1 billion to $9.8 billion a quarter during the financial crisis, and so this loss would be expected by Merrill and Bank of America shareholders.
Plaintiffs in the private action and the New York attorney general’s complaint claim that after this meeting, Mr. Price and other senior executives at Bank of America sought to keep this loss quiet and that Mr. Price in particular misled Mr. Mayopoulos.
Mr. Mayopoulos has testified that on Dec. 3, 2008, Mr. Price told him that the estimated loss would be $7 billion.
Mr. Mayopoulos concluded again that no disclosure was necessary. Plaintiffs contend that Mr. Price misled Mr. Mayopoulos as the forecasted loss at this time had now grown to more than $10 billion.
The Bank of America vote occurred on Dec. 5 without its shareholders knowing about this gigantic looming Merrill loss, which was now about $11 billion.
Mr. Mayopoulos has testified he was surprised at this higher number when he learned of it at a Dec. 9 board meeting. Mr. Mayopoulos sought to meet with Mr. Price about the new loss. The next day, Mr. Mayopoulos was fired and escorted out of the building.
The Merrill acquisition was completed on Jan. 1, 2009.
Two weeks later, Bank of America disclosed for the first time that Merrill had suffered an after-tax net loss of $15.31 billion.
Bank of America has argued in its defense that the exact amount of the loss was uncertain during this time. Moreover, this disclosure was not necessary because Merrill’s losses were within the range of previous losses and included a good will write-off of about $2 billion that was previously disclosed. The total loss was not material.
But if it is true that Mr. Price, with Mr. Lewis’s assent, kept this information from Mr. Mayopoulos in order to avoid disclosure, this is a prima facie case of securities fraud. Would Bank of America shareholders have voted to approve this transaction? If the answer is no, then it is hard to see this as anything other than material information.
Plaintiffs in this private case have the additional benefit that this claim is related to a shareholder vote. It is easier to prove securities fraud related to a shareholder vote than more typical securities fraud claims like accounting fraud. Shareholder vote claims do not require that the plaintiffs prove that the person committing securities fraud did so with awareness that the statement was wrong or otherwise recklessly made. You only need to show that the person should have acted with care.
This case is not only easier to establish, but the potential damages could also be enormous. Damages in a claim like this are calculated by looking at the amount lost as a result of the securities fraud. A court will most likely calculate this by referencing the amount that Bank of America stock dropped after the loss was announced; this is as much as $50 billion. It is a plaintiff’s lawyer’s dream.
Bank of America is facing a huge liability from this claim. It is also facing even more liability for those who bought and sold stock during this period up until Jan. 15. In a ruling on July 29, the judge in this case allowed these claims to proceed against Bank of America, Mr. Price and Mr. Lewis. The judge had already ruled that the disclosure claim related to the proxy vote could proceed.
This case is on a relatively fast track, with an October 2012 trial date.
Given the $50 billion claim looming over it, Bank of America will most likely try to settle this litigation. The settlement value appears to be in the billions. Firing your main witness — Mr. Mayopoulos — and escorting him out the door no doubt only increases the cost.
The case shows how regulators’ actions can be supplemented by private actions. And if the plaintiffs win, this case may be the exceedingly rare event of directors and officers, particularly Mr. Lewis and Mr. Price, actually having to pay money personally to settle a securities fraud claim. If so, the two men would join the relatively few executives from the financial crisis who have been personally penalized.
Whatever the outcome of this case, it appears that Bank of America shareholders were sacrificed in December 2008 so that the Merrill deal could be completed. The bill may now be coming due for Bank of America.