In September 2008, top executives at Bank of America decided to acquire Merrill Lynch. On November 3, 2008 Bank of America sent financial information about the merger to shareholders who would need to approve the deal in a vote on December 5. However, the financial situation at Merrill Lynch rapidly deteriorated and by the time the vote occurred, the information sent to shareholders did not accurately reflect the growing losses at Merrill Lynch. The losses became so large that by January 2009, after the merger had gone through, Bank of America requested and received a government bailout of $138 billion.
As Chairman of the Domestic Policy Subcommittee, I directed my staff to discover how this happened. After a lengthy joint investigation with the Oversight and Government Reform Committee, we determined that the losses at Merrill Lynch should have been known by top Bank of America officials and that their failure to alert shareholders of the growing losses before the December 5, 2008 vote was likely a violation of the Securities Act of 1933 and the Exchange Act of 1934. Bank of America claimed no violation occurred because lawyers for the Bank advised them that informing their shareholders was not necessary. The Securities and Exchange Commission disagreed and filed in federal court against Bank of America.
In 2010, a federal judge in New York accepted a settlement between the SEC and Bank of America in which Bank of America paid $150 million and agreed to some internal reforms. The penalty was paid to shareholders, but many of them were not satisfied. According to New York Times reporter Gretchen Morgenson, "when Merrill's staggering fourth-quarter losses were disclosed along with the taxpayer bailout, Bank of America's shares lost more than half of their value in four trading days. Shareholders lost roughly $50 billion in market value." Some of those investors are now suing Bank of America's leadership.
The lead plaintiffs in the current lawsuit are the State Teachers Retirement System of Ohio and the Ohio Public Employees Retirement System. Their lawsuit focuses on many of the same issues as our Congressional investigation and the subsequent SEC action. Executives at Bank of America knew (or reasonably should have known) that their own projection for losses at Merrill Lynch was not a valid forecast. Those executives likely committed what is called a 'material omission' by not disclosing that information to their shareholders.
Bank of America's Merrill deal exemplifies corporate arrogance: "Wall Street executives know best," "no disclosure unless compelled" and "it's OK to play fast and loose with the rules."
It is imperative Wall Street be held accountable. With the $150 million dollar settlement with Bank of America, SEC Chairman Mary Schapiro has demonstrated that the cop is back on the beat. Yet there is more to be done.
Corporations and their executives need to pay dearly when they harm shareholders or consumers.
The Morning Email helps you start your workday with everything you need to know: breaking news, entertainment and a dash of fun. Learn more