Cuomo Files Charges

Cuomo files civil charges against Lewis, Price, Bank of America

By Rick Rothacker
rrothacker@charlotteobserver.com

Posted: Thursday, Feb. 04, 2010

New York Attorney General Andrew Cuomo today announced that his office is filing civil charges against former Bank of America Corp. chief executive Ken Lewis, former chief financial officer Joe Price and the Charlotte bank.

The charges are the latest legal fallout from a long-running, multi-pronged investigation of the bank’s Jan. 1 acquisition of Merrill Lynch & Co. In question has been the bank’s disclosure of Merrill’s fourth-quarter 2008 losses and bonuses paid to Merrill employees before the deal closed.

The Securities and Exchange Commission and the N.C. Attorney General’s office today also proposed a settlement with the bank that could resolve those agencies’ probes, pending a judge’s approval.

In a news conference this morning, Cuomo said his office is charging the bank with securities fraud because it “understated” Merrill’s losses to investors in order to win approval of the deal during a December 5, 2008, shareholder vote. A little more than a week later, the bank then “overstated” its ability to legally escape the deal in order to obtain $20 billion in government bailout funds, Cuomo said. At the same time, Merrill was paying out $3.6 billion in bonuses to its employees.

Bank of America’s management misled shareholders, the bank’s board and the public, Cuomo said. “The behavior is egregious and reprehensible,” he said.

In the SEC agreement, Bank of America would pay $150 million and strengthen corporate governance practices to settle charges that the company did not properly disclose bonuses and losses as part of the Merrill purchase. N.C. Attorney General Roy Cooper, who also was investigating the deal, was part of that settlement and won additional concessions.

Bank of America today said it will fight the charges filed by Cuomo.

“We find it regrettable and are disappointed that the NYAG has chosen to file these charges, which we believe are totally without merit,” Bank of America spokesman Bob Stickler said. “The evidence demonstrates that Bank of America and its executives, including Ken Lewis and Joe Price, at all times acted in good faith and consistent with their legal and fiduciary obligations.

“In fact, the SEC had access to the same evidence as the NYAG and concluded that there was no basis to enter either a charge of fraud or to charge individuals,” Stickler added. “The company and these executives will vigorously defend ourselves.”

Price is now the bank’s head of consumer banking. Stickler said his job status has not changed.

Cuomo’s investigation began in January 2009 after the bank revealed Merrill’s bigger-than-expected losses and its receipt of extra government aid to close the deal. The New York Attorney General initially focused on the bonus payments before turning to the disclosure of Merrill’s losses. Other agencies and a congressional committee also pried into the deal, forcing testimony by executives and the disclosure of millions of pages of documents.

Bank of America initially agreed to buy Merrill for $50 billion in September of 2008 at the peak of the financial crisis. But with Merrill’s losses ballooning in December 2008, Lewis told Federal Reserve and Treasury officials that the bank was considering using an escape clause in the deal. Government officials pressed the bank to proceed, with threats to oust management and promises of more government aid.

Under continued fire for the Merrill deal, Lewis announced plans to step down on Sept. 30. He was replaced Jan. 1 by Brian Moynihan, previously the bank’s head of consumer banking.

At the morning news conference, David Markowitz, head of Cuomo’s investor protection bureau, said Moynihan was not under investigation because he did not play a role in disclosure-related decisions ahead of the December 5, 2008, shareholder vote. Later that month, Moynihan became general counsel and participated in discussions with the government about the escape clause and additional aid. Markowitz said Moynihan has been “candid” with his office about the role he played.

Markowitz declined to comment on whether the attorney general’s investigation played a role in Lewis stepping down. Bank of America last month paid back its $45 billion in government loans, including the extra $20 billion needed for the Merrill deal.

The proposed SEC settlement is subject to approval by federal judge Jed Rakoff, who has rejected a previous $33 million SEC settlement with the bank. The $150 million penalty would be distributed to Bank of America shareholders harmed by the bank’s alleged disclosure violations.

The settlement also requires the bank to:

-- Retain an independent auditor to audit of the bank’s internal disclosure controls.

-- Have its CEO and CFO certify they have reviewed all annual and merger proxy statements.

-- Hire lawyers to advise the board’s audit committee on disclosure issues.

-- Strengthen the independence of board compensation committee members.

-- Hold an annual “say-on-pay” vote on executive compensation.

Under its agreement with North Carolina, Bank of America will meet twice a year with Cooper’s office to discuss compliance with the agreement and maintain an anonymous hotline to encourage employees to report potential problems or violations. Bank of America will also pay $1 million to the N.C. Department of Justice for consumer protection and education efforts.

Cooper said Bank of America cooperated with his agency’s investigation.

“I’ve talked with the new leadership of Bank of America and I appreciate their continued commitment to North Carolina and their willingness to resolve this dispute in a positive way,” Cooper said in a statement. “We still have much work to do to make sure consumers are treated fairly by all financial institutions.”

The SEC, Cuomo’s office and the N.C. Attorney General’s office said they cooperated in their investigations. Cuomo said that while his charges will take longer to be resolved, the SEC actions should bring more immediate relief to shareholders. Markowitz said the bank had only filed civil charges in the case but indicated the probe is ongoing.

The SEC acknowledged the assistance of the U.S. Attorney’s offices for the Southern District of New York and Western District of North Carolina, the FBI and the Office of The Special Inspector General for the Troubled Asset Relief Program in its investigation. The Observer reported in September that the U.S. Justice Department and the FBI were among the authorities probing Bank of America.

Bank of America shares were down more than 3 percent to $14.95 in early afternoon trading on a down day for the stock market.
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