BofA to Pay $2.43 Billion to End Investor Lawsuit Over Merrill

Bank of America Corp. agreed to pay $2.43 billion to investors who suffered losses during its acquisition of Merrill Lynch & Co. in the largest settlement yet of a class-action shareholder lawsuit stemming from 2008’s financial crisis.

The bank will incur a $1.6 billion litigation expense in the third quarter, the Charlotte, North Carolina-based company said yesterday in a statement. The firm may post a loss for the period after projecting that legal costs, valuation adjustments and tax charges will reduce earnings per share by about 28 cents.

Bank of America has faced regulatory probes, investor lawsuits and criticism from lawmakers over claims it didn’t warn shareholders about spiraling losses at Merrill before they voted to buy the brokerage in January 2009 for $18.5 billion. Under yesterday’s settlement, Bank of America promised to overhaul corporate-governance policies.

“Resolving this litigation removes uncertainty and risk and is in the best interests of our shareholders,” Chief Executive Officer Brian T. Moynihan, 52, said in the statement. “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, the second-largest U.S. lender, slipped 1.6 percent to close at $8.83 in New York. The shares have advanced 59 percent this year, the best performance in the Dow Jones Industrial Average. In addition to litigation costs, earnings for the quarter will be reduced by $1.9 billion in pretax valuation adjustments related to credit spreads and a previously disclosed $800 million expense tied to U.K. taxes, the firm said.

Unexpectedly Large

“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.”

The valuation adjustment and tax charge won’t affect regulatory capital, said Jerry Dubrowski, a bank spokesman.

The company will probably have a per-share loss of about 17 cents in the quarter, Trone estimated.

Shareholders sued in 2009 claiming Bank of America failed to disclose information about bonuses to Merrill employees and about the firm’s financial losses in the fourth quarter of 2008.

“There was a general reference to losses, but never was the magnitude of those losses disclosed,” Ohio Attorney General Mike DeWine said yesterday at a press conference. “This would be akin to telling someone to watch out for a pothole when they were about to fall into the Grand Canyon.”

‘Crazy Price’

Two Ohio pension funds were among the lead plaintiffs in the suit.

Bank of America took its first $15 billion bailout by taxpayers in 2008 as Merrill took $10 billion. A second round of $20 billion came in January 2009 after Merrill’s losses in its final quarter as an independent firm surpassed $15 billion, raising doubts about the lender’s stability if the takeover proceeded.

Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., has criticized former Bank of America CEO Kenneth D. Lewis for the Merrill acquisition, telling the Financial Crisis Inquiry Commission that Lewis paid a “crazy price.” Lewis, 65, struck the deal the same day that Lehman Brothers Holdings Inc. filed for bankruptcy in 2008.

Preferred Shares

“He could have bought them the next day for nothing because Merrill was going to go when Lehman went,” Buffett told the commission in remarks released in February 2011.

Lewis, who as CEO spent more than $130 billion on takeovers, clashed with regulators including the Federal Reserve and then-Treasury Secretary Hank Paulson by trying to back out of the Merrill takeover. Lewis went ahead with the deal under pressure, only to be stripped of his chairman’s title later in 2009 amid a shareholder revolt. That September, he announced plans to step down by year’s end without a successor in place.

In August of last year, Omaha, Nebraska-based Berkshire agreed to invest $5 billion in Bank of America in return for preferred stock paying a 6 percent dividend and warrants to buy 700 million shares at $7.14 each.

“I just wish I’d done it for $10 billion,” Buffett told Bloomberg Television’s Betty Liu in July. Moynihan has been doing “exactly what I would be doing” to help the bank recover from mistakes made before his tenure.

‘Strange Brew’

“They’re continuing to chop through the woodpile of the legacy issues from the credit crisis,” said David Hendler, an analyst at financial research firm CreditSights Inc. in New York. The Merrill takeover “was a strange brew of fundamental strategic desires caught up in the maelstrom of a financial meltdown.”

The settlement is similar in size to deals reached by Nortel Networks Corp. and Time Warner Inc. to resolve investor class-action suits. Nortel, then North America’s largest maker of telephone equipment, agreed to pay $2.4 billion in cash and stock in 2006 to resolve investor complaints over inflated revenue and other accounting flaws. Time Warner agreed to pay $2.4 billion in 2005 to end a shareholder suit stemming from its 2001 merger with America Online.

U.S. District Judge P. Kevin Castel postponed an Oct. 22 trial date after the parties appeared in his Manhattan courtroom yesterday 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.

‘Difficult’ Negotiations

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. The judge also certified a class of investors who held common stock on Oct. 10, 2008 and were entitled to vote on the Merrill acquisition.

Moynihan has been working to resolve legal disputes tied to practices under Lewis. Moynihan last year hired Gary Lynch, the former head of enforcement at the U.S. Securities and Exchange Commission, to help resolve clashes including confrontations with investors who suffered losses investing in mortgage-backed securities.

Bank of America said yesterday that it denies allegations in the lawsuit over Merrill.

‘Roundtripping’ Assets

The corporate-governance measures it will make or continue include shareholder votes on pay, policies for a board committee on acquisitions, disclosures of noncompliance with stock-ownership guidelines, majority voting in director elections and keeping the board’s compensation committee independent. The settlement is subject to court approval.

The measures are changes the bank should have made anyway and they should be permanent, said Charles Elson, a corporate-governance professor at the University of Delaware. The settlement amounts to shareholders paying shareholders, he said.

“It’s roundtripping shareholder assets,” said Elson, who owns Bank of America stock. “The winners here are the public officials who pushed the suit and the lawyers.”

The lender’s earnings will continue to be limited by costs from lawsuits, said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia. He has a market perform rating on the stock and said he expects the bank to report a third-quarter loss.

“We know there’s litigation expenses out there, but what this really shows is that Bank of America is under-reserved,” Miller said in a phone interview. “The only reason they’ve been showing any profitability whatsoever is because they under-reserve in these accounts, and pay as they go.”

The case is: In re Bank of America Corp. Securities, Derivative and ERISA Litigation, 09-mdl-2058, U.S. District Court, Southern District of New York (Manhattan).