WASHINGTON — Bank of America said Friday that it has agreed to pay $2.43 billion to settle a class-action lawsuit related to its acquisition of Merrill Lynch at the height of the financial crisis.
In the lawsuit, shareholders alleged that Bank of America and some of its officers made false or misleading statements about both companies’ financial health.
The lawsuit was filed on behalf of investors who bought or held Bank of America stock when the company announced its plans to buy Merrill Lynch in a $20 billion deal as the banking industry and federal regulators struggled to contain fallout from the financial crisis in the fall of 2008.
Bank of America’s deal to buy Merrill Lynch came together on the same September 2008 weekend that Lehman Brothers collapsed. The transaction came into question later after Bank of America disclosed that Merrill would post $27.6 billion in losses that year. That added significantly to Bank of America’s financial woes, and the company subsequently asked for a $20 billion bailout from the government to help offset those losses, on top of the $25 billion it had already received. It has since repaid all $45 billion.
In announcing the settlement proposal Friday, Bank of America denied the shareholders’ allegations and said that it agreed to the settlement to get rid of the uncertainties, burden and costs related to the lawsuit.
“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 Chief Executive Officer Brian Moynihan said in a statement.
The investors who filed the suit said the amount of the settlement is the largest ever resolving such a claim.
“We are very pleased that the settlement will recoup a substantial portion of the losses incurred by [Bank of America] shareholders,” Brian Guthrie, executive director of the Teacher Retirement System of Texas, said in a statement. “The magnitude of the recovery reinforces the important role that pension funds play when they serve as lead plaintiffs in securities actions.”
Two of Ohio’s public pension funds also were among the plaintiffs in the case. Ohio Attorney General Mike DeWine told reporters at a news conference in Columbus that Bank of America didn’t tell investors all the details about the huge losses that were occurring in Merrill’s fourth quarter.
“There was general reference to losses, but never was the magnitude of those losses disclosed,” DeWine said. “This would be akin to telling someone to watch out for a pothole, when they were about to fall into the Grand Canyon.”
Bank of America shares slipped 1.6 percent to close Friday at $8.83. The shares have advanced 59 percent this year, the best performance in the Dow Jones Industrial Average.
“This settlement is far larger than we expected given the weak merits of such suits and historical precedence,” David Trone, a JMP Securities LLC analyst, wrote in a note to clients. “Bank of America is attempting to rebuild its capital base, and these hits will essentially erase the past six months of progress.” U.S. District Judge P. Kevin Castel postponed an Oct. 22 trial date after the parties appeared in his Manhattan courtroom Friday and told him they’d reached a settlement. He set Nov. 16 as the deadline for the investors’ lawyers to file papers seeking approval of the agreement.
Castel said he was kept “in the loop” on “rather difficult and lengthy negotiations” after he certified the case in February as a class action on behalf of all investors who held the bank’s common stock and call options from Sept. 18, 2008, to Jan. 21, 2009.
As part of the settlement, the bank has also agreed to adopt several corporate governance policies until Jan. 1, 2015. These policies include those related to majority voting in board member elections, annual disclosure of noncompliance with stock ownership guidelines, policies for a board committee regarding future acquisitions, the independence of the board’s compensation committee and its compensation consultants and conducting an annual “say-on-pay” vote by shareholders.
Bank of America, based in Charlotte, N.C., has been dogged by litigation as the consequences of the financial crisis continue to swirl around it. Most of the legal headaches stem from Bank of America’s acquisitions of Merrill and of Countrywide Financial.
The Securities and Exchange Commission won a $150 million settlement from Bank of America in 2009 to resolve charges that it misled shareholders when it acquired Merrill. The SEC had accused Bank of America of failing to disclose to shareholders before they voted on the Merrill deal that it had authorized Merrill to pay as much as $5.8 billion in bonuses to its employees in 2008 even though the investment firm lost $27.6 billion that year.
But a major civil fraud suit against Bank of America and former CEO Kenneth Lewis remains pending from New York state, accusing them of failing to properly disclose the Merrill losses and bonuses before the acquisition closed. The bank has said the charges are unfounded.
Countrywide spiraled into disaster when investors realized that many homeowners wouldn’t be able to repay rising adjustable-rate mortgages that had required no proof of income or a down payment.
The Countrywide purchase in July 2008 made Bank of America a major player in the U.S. mortgage market. Regulators, meanwhile, portrayed Countrywide’s huge size as the result of its executives’ single-minded pursuit of market dominance, even if it meant taking disastrous risks.
In the legal aftermath, Bank of America entered an $8.4 billion settlement with 12 states over Countrywide’s lending practices. A class-action suit by former Countrywide shareholders cost the bank another $600 million. Bank of America has paid more than $13 billion for investor claims related to mortgages.
Both acquisitions turned out to be “very troublesome” for Bank of America, said Bert Ely, a banking industry consultant based in Alexandria, Va. “They’re still cleaning up the mess,” Ely said.
Bank of America’s mortgage division hasn’t turned an annual profit since 2007.
After years of gobbling up other companies, the bank has been shrinking, laying off employees and selling operations.
“The challenge is trying to right-size the company” and get its earnings up to snuff, Ely said. The bank “still is not a top-notch performer. It has got more work to do.” Information for this article was contributed by Marcy Gordon and Ann Sanner of The Associated Press and Zachary Tracer, Bradley Keoun, Noah Buhayar, Donal Griffin, David Scheer, Rick Green, Bob Van Voris, Steven Crabill, Sophia Pearson and Mark Niquette of Bloomberg News.
Front Section, Pages 1 on 09/29/2012