In a lawsuit against the Bank of America Corp (NYSE:BAC), shareholders have alleged they weren’t informed prior to the bank’s 2008 purchase of Merrill Lynch that the combination would result in years of losses, reported The New York Times.
The suit, which was filed in New York, has documents showing that Bank of America’s top executives had been warned about the possible losses from the Merrill Lynch acquisition in the days prior to the vote but failed to share this information with investors. By doing so, shareholders received more optimistic projections from the bank that soon after its completion, the deal would bring in money.
We all know how this turned out: the $50 billion purchase eventually resulted in a second $20 billion government cash bailout.
Neither Bank of America officials nor an attorney for then Bank of America’s CEO Kenneth Lewis, Andrew J. Ceresney, has commented but he referred to a motion filed on Lewis’ behalf that maintained that he did not share the losses at the advise of the bank’s law firm, Wachtell, Lipton, Rosen & Katz, and by other bank executives.
In addition, Lewis is also a defendant in the suit as well as Bank of America board members who had recommended to shareholders that they approve the Merrill merger.
Losses Hit Merrill’s Position Prior to Vote
According to The New York Times, e-mail messages has shown that Merrill’s losses had eroded its financial position prior to the shareholder vote. Furthermore, according to the court filing, by Nov. 26, Bank of America had ordered Merrill to sell hundreds of billions of dollars in assets. This reduced the combined companies’ future earnings power by at least $1 billion a year, testified the bank’s previous treasurer, Jeffrey J. Brown.
Merrill’s problems also had the bank raise a $9 billion debt offering in the days before the shareholders vote according to the court filing. In a Dec. 4, 2008 email, Brown told bank executives that this as well as other debt offerings came from Merrill’s poor financial conditions and had worsened the “dilution impacts” of the merger. He added, “It hurts your #s I know, but this is real and should be associated with the transaction.”
And two business days after shareholder approval of the deal, the bank’s board met and reviewed details from the $14 billion pretax fourth-quarter loss. It also learned the transaction would impact bank’s earnings more than had been disclosed to the public.
Fast forward to a month later and Lewis publicly announced the completed deal on Jan. 1, 2009. He said at the time, “We created this new organization because we believe that wealth management and corporate and investment banking represent significant growth opportunities, especially when combined with our leading capabilities in consumer and commercial banking. We are now uniquely positioned to win market share and expand our leadership position in markets around the world.”
Just a few weeks after the announcement, Merrill’s fourth-quarter losses had been announced as well as the taxpayer bailout. In just four trading days, Bank of America’s shares dropped more than half of their value while shareholders lost about $50 billion in market value, reported The New York Times.