Risk Management

BofA Execs Hit with Civil Charges

In the wake of the bank's proposed settlement with the SEC, a new suit by the New York Attorney General accuses former CFO Joe Price and ex-CEO Ken...
David Katz and Vincent RyanFebruary 4, 2010

On the same day that New York Attorney General Andrew Cuomo filed a civil fraud suit against Bank of America and its former chief executive Ken Lewis and former CFO Joe Price, the Securities and Exchange Commission sought federal court approval for a settlement with BofA on charges tied to the bank’s acquisition of Merrill Lynch.

The settlement with the SEC calls for corporate-governance and executive-compensation disclosure practices that go beyond what’s required by the Sarbanes-Oxley Act, and for the bank to pay $150 million to shareholders.

The suit filed by Cuomo on Thursday details an attempt by Lewis and Price, now head of consumer banking for BofA, to hide huge losses from bank shareholders so that they would vote to approve the $50 billion takeover of Merrill Lynch.

The suit alleges that in the process of acquiring Merrill, BofA management — Lewis and Price in particular — misled shareholders, the public, and the bank’s board and its lawyers by concealing Merrill’s “disastrous fourth quarter financial results.”

“Bank of America’s management thought of itself as too big to play by the rules and, just as disturbingly, too big to tell the truth,” says the suit.

In particular, the suit alleges Lewis and Price chose to hide as much as $16 billion in actual fourth-quarter losses at Merrill that occurred after the merger proxy was filed in early November but before the December 5 shareholder vote. “Bank management knew at the time that additional losses were forthcoming and that Merrill had become a shadow of the company Bank of America had described in its proxy,” the suit says.

The lawsuit also says BofA management “manufactured” an acceleration of losses at Merrill after the shareholder vote in order to strengthen its plea for a capital infusion from the federal government. Bank management also allegedly failed to disclose that Merrill had changed its bonus criteria and had decided to pay $3.6 billion in bonuses to employees at the end of calendar-year 2008, three months before it customarily did.

In a BofA statement responding to the suit, Price says he did “exactly what a responsible regulator would want and expect from a chief financial officer.” He claims he raised the question of whether disclosure was adequate in light of projected losses, made available all information he deemed relevant to the issue, and followed counsel’s advice.

But the suit claims Price did not disclose the extent of losses to BofA general counsel Timothy Mayopoulos and outside counsel Wachtel, Lipton, Rosen and Katz, and deliberately understated losses to convince them that no disclosure was necessary.

In the SEC proposed settlement, subject to approval by Judge Jed Rakoff of the U.S. District Court for the Southern District of New York, BofA would have to establish the following governance practices and maintain them for three years:

1. Hire an independent auditor to perform an audit of the bank’s internal controls over disclosure. Unlike financial-reporting controls, which under Sarbox must be audited by both the company and an independent auditor, corporate-disclosure controls are subject to internal assessment only.

2. Have its chief executive and CFO certify that they have reviewed all annual proxy statements and merger proxies. While Sarbox requires CEOs and CFOs to sign off on company 10-Qs and 10-Ks, there is no such requirement involving proxies.

3. Hire a “disclosure counsel” who would report to and advise the board’s audit committee on BofA disclosures, including current and periodic filings and proxies.

4. Set up a “super-independence” standard for all members of the board’s compensation committee, meaning that committee members are prohibited from accepting other compensation from the bank. Under Sarbox, only the audit committee is subject to such a standard.

5. Keep a consultant to the compensation committee on hand. The consultant would also have to meet super-independence criteria.

6. Provide shareholders with an annual advisory “Say on Pay” vote on executive compensation. The nonbinding vote would apply to details disclosed in the Compensation Discussion and Analysis section and compensation tables in proxy reports. Scott Black, a senior trial counsel, told CFO that BofA was subject to that provision after it received aid under the Troubled Asset Relief Program. When the bank paid off what it owed under TARP, however, it was no longer required to invoke Say on Pay.

7. Put in place and maintain incentive-compensation principles and procedures and publish them on BofA’s Website. The bank would have to keep them online for three years, according to Black.

The SEC cooperated with Cuomo and coordinated its investigation with his, according to the commission trial attorney, who said the SEC was “optimistic” that Judge Rakoff would approve the settlement.

Lewis’s attorney, Mary Jo White of Debevoise & Plimpton, said in a statement, “The decision by Mr. Cuomo to sue Bank of America, Mr. Lewis and other executives in connection with BofA’s acquisition of Merrill Lynch is a badly misguided decision without support in the facts or the law.”