Bank of America Corporation (BAC) is yet again haunted by the legal complications. BofA is now facing a private lawsuit of $50 billion over its Merrill Lynch acquisition. Though the lawsuit is not new, a judge has allowed shareholders’ claims to proceed recently in August.
The lawsuit was filed by a group of BofA shareholders, claiming that the company and its senior former and present executives (including former CEO Mr. Kenneth D. Lewis and CFO Mr. Joseph Price) failed to reveal that there would be losses of about $15.3 billion to Merrill Lynch immediately before and after the completion of the acquisition.
The plaintiffs have put forward their case on the basis of the fact that BofA had deliberately concealed the losses from the shareholders to ensure that they vote in favor of the deal. BofA acquired Merrill Lynch on January 1, 2009.
However, immediately after the completion of the transaction, BofA disclosed this loss and also revealed that it has received bail-out money of $20 billion from the government. All these revelations led to a lawsuit from the Securities and Exchange Commission (SEC) in 2010, which BofA later resolved with payment of $150 million.
In the present lawsuit, almost similar charges have been filed by the plaintiffs. According to them, the then CEO and CFO had started getting an idea about the huge losses at Merrill Lynch since November 2008. They also misled the company’s general counsel stating that the losses would be in the range ($2.1-$9.8 billion) within which Merrill Lynch had been losing per quarter since the financial crisis. Hence, the company’s general counsel also decided against revealing these losses to the shareholders. However, when the shareholders vote was held on December 5, 2008, losses had already zoomed to nearly $11 billion.
In its defense, BofA has argued that the exact amount of loss was not possible to ascertain at that time. Hence, the disclosures were not required. However, even if this is true, there was possibly no reason to keep away the information from the company’s general counsel. This, according to the plaintiffs, is a sure shot case of securities fraud.
Further, making this lawsuit against BofA strong is the fact that the claim is related to a shareholder vote, an easier to prove than other securities fraud claims, such as accounting fraud.
The trial date of the lawsuit is set for October 2012. BofA has time till then to make a settlement or go ahead with the lawsuit. However, if plaintiffs win the lawsuit, then the former CEO and CFO would have to personally pay money to settle the claim.
Presently, BofA in entangled in a number of lawsuits related to mortgage backed securities, which also led the company to report losses in the second quarter of 2011. Hence, if this lawsuit goes against the company, then BofA would continue to report in red for several quarters.
This also justifies BofA’s current long-term “Underperform” recommendation. Also, the company currently retains a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating. However, one of the close peers of the company, JPMorgan Chase & Co. (JPM) has a long-term Neutral recommendation.
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