Europe’s largest pension fund sued Bank of America earlier this week in a New York federal court, claiming the bank company intentionally withheld crucial information about its acquisition of Merrill Lynch in 2008.
Stichting Pensioenfonds ABP, which is one of the three largest pension funds in the world, is seeking “compensation for the damages caused by the defendants’ negligent use of materially misleading proxy materials to solicit shareholders votes to approve BofA’s $29.1 billion acquisition of Merrill Lynch,” according to the suit, which was filed in the U.S. District Court for the Southern District of New York.
The suit also names BofA’s [BAC] former chief executive, Kenneth A. Lewis; former Merrill CEO, John Thain; Walter Massey, the current BofA chairman who succeeded Lewis, and several other board members and top managers as individual defendants.
Jay Eisenhofer, a co-founder and managing director of law firm Grant & Eisenhofer, which is representing ABP in the case, said BofA “shareholders did not get a large enough share of the combined company.”
Moreover, he said if BofA shareholders had been fully informed of Merrill’s condition, it wouldn’t have accepted the merger unless they received a bigger share. So now, the banking company will have to compensate its shareholders at a more appropriate level, he says.
Eisenhofer said he expects there to be more lawsuits from other defendants and that the whole process could take two to three years to play out.
This is the type of lawsuit BofA probably feared, said Chip Roame, a managing principal at Tiburon Strategic Advisors, in an email. The pension fund’s lawsuit uses the chronology of the firm's actions and the government's various investigations to build its case, he said. Often, once a company settles a case with the Securities and Exchange Commission, it is in a precarious position, which leaves it open to other lawsuits.
Nonetheless, Eisenhofer doesn’t believe that the SEC settlement necessarily helped pave the way for other suits. But, he did acknowledge that the settlement, along with N.Y. Attorney-General Andrew Cuomo’s lawsuit, gave merit to the widespread belief that the bank acted in an “egregious” way.
Roame predicted that BofA would wait for other suits to be filed, “delay a bit, size up the cost, and eventually settle them all.”
Specifically, the suit said that BofA failed to disclose the fact that it had approved a “secret bonus schedule” that gave Merrill the authority to pay up to $5.8 billion in bonuses. The suit also claims that BofA negligently failed to disclose the following: its inadequate due diligence prior to the deal; its decision to internally write down Merrill’s goodwill by $2.3 billion; and its failure to disclose “massive fourth quarter losses” that were mounting at Merrill prior to the Dec. 5, 2008 shareholder vote. Consequently, those shareholders were deprived of their rights to be “fully and fairly informed at the shareholder vote,” the suit said.
ABP is the pension fund for government and education employees in the Netherlands. It had $286 billion of assets as of Dec. 31.
BofA’s acquisition has had problems from day one with suits from the SEC, the New York Attorney General and a federal judge who has made some surprising decisions along the way.
The latest development saw Judge Jed S. Rakoff from the U.S. District Court for the Southern District of New York reluctantly approve a $150 million settlement between BofA and the SEC regarding the bank’s disclosures of Merrill’s financial losses.
Rakoff said the settlement did not truly address the issues of fairness and public interest, but he said that both sides had reminded him that the law specifies that the SEC be given “substantial deference” as a regulatory body.
Last September, Judge Rakoff had rejected a proposed settlement of $33 million, partly on the grounds that it was unfair to the BofA’s shareholders. This time, he demanded that the settlement be adjusted so that funds would be distributed to the legacy BofA shareholders harmed by the non-disclosures and not the Merrill Lynch shareholders.
Also last month, New York Attorney General Andrew Cuomo’s office filed charges against Bank of America Corp. as well as it former chief former chief executive Kenneth Lewis and its former chief financial officer Joseph Price for allegedly hiding losses at Merrill Lynch before its acquisition of the brokerage firm.
According to that lawsuit, BofA's management intentionally failed to disclose massive losses at Merrill before shareholders approved the acquisition. Moreover, once the deal was approved, management then allegedly manipulated the federal government into granting a massive taxpayer bailout, according to the complaint. Cuomo’s suit is still pending.
BofA declined to comment on the latest suit from ABP.