BofA’s Merrill Lynch Settlement Inadequate, Lawyers Contend

BofA’s Merrill Lynch Settlement Inadequate, Lawyers Contend
The Bank of America Tower in New York. Photographer: Daniel Acker/Bloomberg

Bank of America Corp. directors’ $20 million settlement of investor lawsuits alleging the bank overpaid when it bought Merrill Lynch & Co. amounts to just 4 percent of the board’s $500 million in insurance coverage and is inadequate, lawyers objecting to the accord said.

Attorneys for Bank of America shareholders suing in Delaware over the $50 billion acquisition of Merrill Lynch have asked a judge in that state to keep their claims alive even though a federal judge in New York is considering a $20 million settlement of almost identical suits brought by other bank investors. If that accord is approved, it could wipe out the Delaware claims.

“The proposed settlement is grossly inadequate and represents only 0.4 percent of the value of the $5 billion derivative claims that the Delaware Derivative Plaintiffs have been vigorously pursuing,” lawyers for the Delaware investors said in a Delaware Chancery Court filing late yesterday. The settlement also amounts to “only 4 percent” of available insurance, they said.

The total amount of insurance coverage for directors of Charlotte, North Carolina-based Bank of America, the second-largest U.S. bank, was blacked out of the filing. Bloomberg News’s calculations show the total is $500 million.

The suits in New York and Delaware focus on whether Bank of America directors violated their legal duties to investors in approving the 2008 acquisition of Merrill Lynch.

Subprime Meltdown

Disgruntled shareholders contend the board and former Chief Executive Officer Kenneth D. Lewis misled them about the brokerage firm’s losses leading up to the buyout and should have pulled the plug on the deal. Lewis, who left Bank of America in 2009, is now chairman of Chicago-based LaSalle Bank NA.

New York-based Merrill Lynch, founded by Charles E. Merrill in 1914, suffered at least $50 billion in losses and writedowns linked to the collapse of the U.S. subprime mortgage market before agreeing to the sale in September 2008.

Lawrence Grayson, a Bank of America spokesman, declined to comment on the filing in the Delaware suit against the company’s directors in a telephone interview today.

Lawyers representing pension funds in Louisiana and Florida who sued in federal court in New York over the Merrill buyout reached the $20 million settlement April 12, according to court filings.

Attorneys for investors who sued Bank of America’s board over the purchase in January 2009 contend the $20 million accord amounts to a fraction of the damage the company suffered as a result of the Merrill Lynch buyout.

$150 Million Fine

The Delaware investors filed a so-called derivative action which would return any recovery from insurance covering directors to the bank’s coffers rather than to individual shareholders.

The $20 million New York settlement is about 13 percent of the $150 million fine the U.S. Securities and Exchange Commission levied against Bank of America in 2010 over the Merrill Lynch purchase.

The SEC accused Bank of America in August 2009 of failing to disclose to investors it had agreed to let Merrill Lynch pay as much as $5.8 billion in employee bonuses and incentives.

U.S. District Judge Jed Rakoff in New York called the original settlement offer a “contrivance” between the SEC and Bank of America and questioned why bank executives or their lawyers weren’t sued.

Rakoff later approved the $150 million accord after the SEC expanded the claims, saying the bank had also failed to disclose Merrill’s expected losses.

‘Collusive Process’

The $20 million settlement also resulted from a “collusive process” between directors’ lawyers and plaintiffs’ attorneys representing New York investors and is an attempt to avoid an October trial in Delaware, the Delaware lawyers said in the filing to Delaware Chancery Court Judge Leo Strine.

Lawrence Portnoy, a New York-based lawyer representing Bank of America directors, approached attorneys for investors who had sued in New York with a settlement proposal after lawyers for Delaware investors rebuffed the idea, according to the filing.

Portnoy testified in pretrial proceedings that he suggested to the New York lawyers “it might be possible to reach a settlement based on corporate governance measures,” the Delaware attorneys said in the filing.

Directors’ Response

Such settlements require companies to change business practices rather than pay financial penalties. Portnoy declined to comment on the filing today in a telephone interview.

The $20 million payment, slated to come out of Bank of America’s insurance coverage, later was added to the accord, the Delaware lawyers said. The deal also doesn’t’ require any individual defendants to personally contribute to the settlement, they added.

Lawyers for Bank of America board members counter in their own filings that there’s no evidence directors acted in bad faith in considering the Merrill Lynch acquisition and there are no grounds for them to be held personally liable for damages suffered by the bank.

“There are no facts that create a genuine issue as to whether defendants decided in bad faith not to disclose information to stockholders,” the board’s lawyers said in an April 25 filing in Delaware.

Robert Harwood, a New York-based lawyer representing the New York investors, didn’t immediately return a telephone call for comment on Delaware attorneys’ arguments that New York plaintiffs colluded with Bank of America directors to settle the case cheaply.

The Delaware lawyers have lodged an objection to the New York settlement with U.S. District Judge Kevin Castel. He hasn’t decided yet whether to approve the accord.

Stay Request

The Delaware lawyers are asking the Delaware Chancery Court’s Strine to deny Bank of America directors’ bid to have the Delaware case put on hold until Castel rules on the New York settlement.

The New York case is In re Bank of America securities, derivative and employee retirement income securities act litigation, 09-02058, U.S. District Court, Southern District of New York (Manhattan.) The Delaware case is Nancy Rothbaum v. Kenneth D. Lewis, CA4307, Delaware Chancery Court (Wilmington).

Before it's here, it's on the Bloomberg Terminal. LEARN MORE