Legal Affairs: LAWSUITS
BANK OF AMERICA'S BACK IS AGAINST THE WALL
A trial looms over charges that it defrauded local governments
After the Great San Francisco Earthquake of 1906, BankAmerica Corp. founder A.P. Giannini personally lent cash to victims, asking only for a handshake as collateral. Ever since then, the state's largest bank has worked hard to be a model corporate citizen, sponsoring cultural events, boosting minority hiring, and forging close ties with California's political elite. One of the many payoffs has been BofA's role as chief banker for hundreds of cities and counties along the coast.
But now, many of the bank's longtime government customers are accusing the economic and political powerhouse of thievery. In April, State Attorney General Daniel E. Lundgren, the city of San Francisco, and 250 other political subdivisions will go to state Superior Court in a suit charging the bank with defrauding taxpayers of hundreds of millions of dollars while it managed municipal bonds for them from 1978 to 1993. As the trial draws closer, elected officials are giving the nation's fifth-largest bank a drubbing--one that threatens to drive away some of the bank's valuable clients. "The bank is so entrenched that it felt it was above scrutiny and above the law," says Riverside County Supervisor Bob Buster, one of the plaintiffs.
The suit centers around the bank's role as the trustee for billions of dollars of municipal-bond offerings. This job required BofA to invest money raised by the state and cities and then to forward proceeds to thousands of bondholders. Bondholders were generally required to send in coupons and matured bonds to claim interest and principal, but as many as 3% of them may have failed to do so. The plaintiffs allege that BofA illegally kept the unclaimed money, rather than returning it to the state and cities.
"BAFFLING." The suit also accuses the bank of billing for services it didn't perform, overcharging for those it did perform, and hiding evidence of its alleged misdeeds (table). Arguing that other institutions with bond trust companies have engaged in abuses similar to the ones BofA is alleged to have committed, Zane Mann, publisher of The California Municipal Bond Advisor, hopes the suit will "open the curtain so people can see what's going on" and eventually "close down some of these practices."
Bank of America denies it committed theft, fraud, document destruction, or any of the other illegal acts alleged in the suit. While bank executives admit its corporate trust office made some errors, it claims these mistakes unintentionally arose in the process of switching to a new record-keeping system. Before the suit was filed, the bank says, it conducted an internal review and returned the unclaimed bond money it owed, about $47 million. In fact, it sold its municipal-bond-management unit in 1995. In the eyes of bank executives, politicians are simply bashing the bank to make hay with voters. "The steady stream of invective aimed at the bank is baffling," says BofA spokesman John Keane. "The more of a media campaign they conduct, the less of a case we think they have."
The controversy might never have come to light but for a whistle-blower named Patrick Stull. After joining BofA as a systems analyst in 1978, Stull rose to vice-president in the corporate trust division. Although he did not participate in bond management, Stull says he heard rumors "about the mess" and observed some disarray firsthand. "They had boxes and boxes of live bearer bonds lying around, with no security," he says. The bank responds that Stull never complained about these problems while he was a member of management.
Because he needed more time to take care of a seriously ill newborn son, Stull left the bank in 1990 to become a private consultant specializing in advising governments on cash management. Hired by four municipalities that had business with BofA, Stull discovered that the bank had overcharged each city for bond-management services and eventually won each of them refunds.
Convinced the problems were widespread, Stull filed a whistle-blower complaint against the bank in 1995. State law allows citizens who learn of possible wrongdoing that costs the government money to sue--and to keep part of the proceeds if they win. His suit obligated the attorney general's office to conduct its own probe, which uncovered evidence that the bank may have kept unclaimed bond money.
OFF TRACK. Based on their investigation, government officials say BofA's backroom operations were a mess for years, starting with disorganized manual record keeping. By the mid-'80s, the suit argues, the bond office had lost track of the money it had in hundreds of accounts. As a result, the bank did not know if there was enough money in each bond account to pay outstanding claims--potentially a violation of state law requiring bond accounts to be "balanced."
In 1986, the bank changed to a new computerized system, but the conversion, plagued by bad management, never straightened out the accounts, plaintiffs say. According to bank documents, the company that sold BofA the new record-keeping system advised the bank in 1987 that it should figure out how much it had paid out from each bondholder account and what was left unclaimed. But nearly two years later, an internal audit gave the unit an unsatisfactory rating, noting that only 50 of 7,000 bond-issue accounts had been balanced. BofA General Counsel James N. Roethe couldn't recall details about the vendor's warning. He says the audits were "self-improvement" attempts to solve the problem.
The plaintiffs claim, though, that the bank started to artificially balance these accounts, dropping from the system all unpaid bonds and falsely recording them as paid. Any cash left over in a bondholder account, they contend, was placed in a "reserve" to pay other expenses. As evidence, the plaintiffs cite several internal BofA documents, such as one indicating that in July, 1991, trust officers were unable to identify the source of $1.2 million in a customer account. Calling it a "sundry recovery," an executive of the unit transferred it to the bank's own reserves. Roethe says the reserves were used to pay off bondholders who came in with claims.
By the end of 1991, the suit alleges, the bank "destroyed or lost" most of the paperwork recording this alleged account-cleansing campaign--a charge the bank denies. The judge has appointed an expert to help determine the veracity of the records, and Roethe is convinced the bank will be vindicated. "We have most of the documents or we have some backup form of documentation," he says. The reason opponents are charging document destruction, he says, is because they have not been able to come up with evidence that the bank owes more money. "Frankly, I don't think they have devoted the time or energy to look at these records," says Roethe.
Diane L. Merdian, an analyst at NationsBanc Montgomery Securities Inc., believes that the bank's ultimate liability, if any, will be "in the tens of millions" rather than the hundreds of millions sought by its opponents. But with politicos bashing the bank, there are other worries. "Probably the real economic issue will be whether they can lose business as a result of the appearance of having harmed customers," she says.
That's bad news for an institution that has spent so much time and energy burnishing its image. Unless the parties can reach a settlement soon--and right now, there's no sign that a deal is in the offing--it may be some time before BofA can win back its good name in town halls across California.By Susan B. Garland in Washington, with Steve Hamm in San Francisco and Mike France in New YorkReturn to top