Fordham Law


Cuomo Sues Bank of America, Even as It Settles With S.E.C.

Steven Thel in The New York Times, February 05, 2010

Media Source

By LOUISE STORY

The legal drama surrounding the controversial takeover of Merrill Lynch by Bank of America, one of the pivotal moments of the financial crisis, took a fresh turn on Thursday as the attorney general of New York leveled civil fraud charges against Kenneth D. Lewis, the former Bank of America chief who masterminded the deal.
But no sooner did that news break than the Securities and Exchange Commission announced that it had struck a new, $150 million deal with Bank of America to settle its own cases involving the merger. Moments later, North Carolina’s attorney general announced that his office also had reached a settlement.

The developments open several new fronts in one of the most closely watched legal battles in American finance — one that now pits Wall Street enforcers against each other.

Andrew M. Cuomo, New York’s attorney general, is upping the ante in a match against Mr. Lewis and Bank of America. The S.E.C., however, is eager to put the matter to rest after suffering embarrassing setbacks in its case. Bank of America insists its executives did no wrong, although it, too, wants to put the case behind it.
Mr. Cuomo, who is expected to run for governor of New York and has been investigating the case for a year, is riding the wave of popular anger directed at big banks, which have stunned many Americans with their quick recovery from the financial collapse. Much like the S.E.C., his office claims that Bank of America essentially hid from its shareholders billions of dollars in losses at Merrill, which later forced Bank of America to seek a second bailout from Washington.

But unlike the S.E.C., which has focused broadly on Bank of America itself, Mr. Cuomo has focused instead on Mr. Lewis and another executive, Joe Price, who was Bank of America’s chief financial officer when the Merrill deal was struck. The fallout from the star-crossed deal eventually drove Mr. Lewis from his post as chief executive. Mr. Price remains at the bank, though he stepped down from the chief financial officer job this year.

Lawyers for both Mr. Lewis and Mr. Price said the charges were without merit. The bank is paying both executives’ legal fees.

“Mr. Lewis has been unfairly vilified by the political search for accountability for the financial meltdown,” said Mary Jo White, a lawyer at Debevoise & Plimpton who represents Mr. Lewis.

Mr. Cuomo made some new claims in a 90-page complaint filed on Thursday. The complaint painted Mr. Price as the central figure in the case. Mr. Cuomo accused Mr. Price of hiding the extent of Merrill’s losses from Bank of America’s own lawyers when seeking advice on whether to update shareholders about the deepening pool of red ink.

One Bank of America executive commented in a note about the losses that read “read and weep,” the complaint says.

Mr. Cuomo is wielding a powerful weapon in his case. Under New York State’s Martin Act, the attorney general has broad powers in securities enforcement.
The S.E.C., meantime, is seeking to bring its long, troubled investigation to an end. But its new settlement is subject to approval by United States District Judge Jed S. Rakoff — the same judge who rejected a previous $33 million accord as woefully low and, in blistering terms, accused the S.E.C. of going too easy on Bank of America and its executives.

Judge Rakoff will hold a hearing on the new settlement on Monday.
Legal experts said that many controversial issues stemming from the financial crisis — rich bonuses for bankers, allegations of government fraud, potential harm to investors — come together in the Merrill-Bank of America case.

Lawmakers in Congress used the merger as an opportunity to interrogate the leaders of the Federal Reserve and Henry M. Paulson Jr., who was Treasury secretary when the merger was struck.

“This transaction had nothing to do with causing the crisis; this transaction helped solve it,” said Steven Thel, a professor at Fordham University School of Law. “But everything that people think has gone wrong in the last few years is tied up in this transaction. People are upset because they see this as the tawdry side of the bailout. It shows the qualities of Wall Street.”

Bank of America directors pressed in recent months to settle both cases. But Mr. Cuomo was unwilling to settle for a small sum and wanted Mr. Lewis and Mr. Price held accountable. The bank seized on the S.E.C.’s decision not to charge individuals as evidence that Mr. Cuomo’s case was without merits.

“The S.E.C. and the attorney general’s office looked at the same evidence and the S.E.C. concluded there was no reason to charge people,” said Bob Stickler, a spokesman for the bank. “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.”

The S.E.C. said it would distribute the fine it was seeking from Bank of America to shareholders who owned Bank of America stock at the time of the merger. Former Merrill shareholders, in other words, will effectively pay the fine. The settlement also includes some corporate governance reforms, which have appealed to Judge Rakoff in past settlements.

If the judge rejects the settlement, the S.E.C. and the bank are scheduled to try the case beginning March 1.

People following Mr. Cuomo’s case said that the attorney general’s showdown with Bank of America would probably drag on for some time.

“This is certainly not the end, and it’s more likely the beginning of a long, drawn-out death march,” said Michael W. Robinson, a senior vice president with Levick Strategic Communications. “Attorney General Cuomo has found an issue that neatly ties together populist anger and a sense of the malfeasance of bankers, who are not the most popular people these days.”