On Friday, Bank of America announced it would settle its ongoing class action lawsuit that goes back to its Merrill Lynch acquisition – and it’s going to cost the bank $2.43 billion.
You may recall a group of investors who, at the time, were in the process of buying or already own shares of the bank stock, hired a team of attorneys to file the suit when they learned the bank intended to buy Merrill Lynch. This all happened when the financial sector was in a tailspin during late 2008.
The many allegations included Bank of America and at least a few of its officers misled the plaintiffs in its statements about the financial health of both banking giants. Another interesting fact is those who drove the bank into the ditch to start with aren’t being held liable. Former CEO Ken Lewis isn’t on the hook, either, since it’s customary for the employment contracts to release officers from any financial liability.
False & Misleading Statements
Among the plaintiffs allegations was that Bank of America and some of its officers made false or misleading statements about both companies’ financial health. Further, they accused Bank of America of adding “toxic” mortgage related assets to the balance sheets along with the embarrassing additions brought on by the purchase of Countrywide Financial. This settlement, however, doesn’t include its ongoing problems with both Fannie Mae and Freddie Mac over their demands that the bank take back all of its bad mortgage backed securities.
Remember, a few weeks ago, the Fed announced it would be buying $40 billion in mortgage backed securities from – you guessed it – Fannie Mae and Freddie Mac – and this has some consumers and analysts worried. And speaking of consumers – the icing on the cake for many is the controversial decision of the bank in approving $5.8 million in bonuses to its executives despite the problems it knew it was facing.
Still, Bank of America holds to its denials of the allegations and says it’s only settling not because the allegations are true, but because it’s been an embarrassing four years and the burdens of the lawsuit have become distracting (we’re wondering if the word “burdensome” might be a better word?).
As we work to put these long-standing issues behind us, our primary focus is on the future and serving our customers and clients,
Bank of America CEO Brian Moynihan said in a statement. There’s no denying that had the settlement not been reached, the potential costs could have greatly eclipsed this financial agreement. It’s believed up to a third of this settlement could land in the laps of the lawyers.
Of course, this settlement is exactly “settled” until the court approves it and it’s in Judge Kevin Castel’s hands. He, of course, is in the United States District Court for the Southern District of New York. And, too, this isn’t the only legal problem Bank of America is embroiled in. This latest $2.43 billion payment comes on the heels of the $20 million settlement that resolved shareholder derivative action this past May along with the $150 million penalty imposed in 2010 in the case that was filed by the Securities and Exchange Commission regarding proxy disclosures.
You may recall, too, that the original amount demanded by SEC was a measly $33 million. That was rejected by another judge due to the unfairness it lent to shareholders, who would have had to shoulder the rest of the financial burden when they were the ones who were most affected by the proxy disclosures in the first place.
So what’s included in this most recent settlement? For starters, the bank has agreed to take n new corporate governance policies for the next two years. Everything from new policies regarding majority voting guidelines for board elections to annual disclosures of noncompliance issues relating to stock ownership guidelines are a part of these policies. In its presser late Friday, it announced it would be using its existing ligation reserves initially but would also kick in another $1.6 billion in the third quarter. It then announced (or warned) that the suit and resulting payouts would lower third quarter earnings by about .28 cents. We’ll know for sure on October 17 when it releases those results.
One More Legal Hurdle
In the meantime, there’s still one more hurdle for the bank. Another lawsuit was filed at the same time, but by then New York AG Andrew Cuomo. His suit claims the Martin Act was violated. That’s the state’s securities fraud law and Cuomo used it to accuse the bank of misleading investors about the true health of Merrill Lynch during the acquisition. If this case goes to trial, it’s going to be devastating for the financial industry as a whole and specifically the big banks since many will find themselves testifying about what they really knew about the sector during that time. Some say these bank officers will be telling all about the role of the federal government and the insistence that they pushed the collapse that led to the recession many say we’re still in.