Kevin LaCroix at The D&O Diary delivers news that surprises no one, a securities class action based upon Bank of America’s untimely disclosure of Merrill Lynch’s catastrophic losses:

As has been well-publicized, within a matter of weeks of closing its acquisition of Merrill Lynch, Bank of America announced previously undisclosed 4Q08 operating losses at Merrill of $21.5 billion that required BofA to obtain an emergency $20 billion cash injection from the U.S. Treasury, as well as an additional $118 billion asset backstop. BofA’s stock market valuation has dropped more $100 billion since the day before the merger was announced through the company’s January 16 earnings release.

As the Wall Street Journal reported (here), questions immediately arose following BofA’s announcement of the Merrill losses, such as why BofA’s CEO Kenneth Lewis "didn’t discover the problems prior to the Sept. 15 deal announcement" and "why he didn’t disclose the losses prior to the vote on the Merrill deal on Dec. 5 or before closing the deal on Jan. 1."

With these kinds of questions circulating, it comes as no surprise that plaintiffs’ attorneys have initiated litigation. There were actually two different lawsuits announced on January 21, 2009 relating to these circumstances. Both of the lawsuits purport to be filed on behalf of persons who held BofA securities on October 10, 2008, the record date for the December 5, 2009 special meeting of shareholders to approve the merger.

LaCroix, no stranger to director and officer liability, has a thorough take on it, and Ideoblog raises the possibility of a "national interest" exception to securities disclosure laws due to the circumstances: on December 17, Lewis had become so concerned that he went to DC to meet with Bernanke and Paulson for guidance, both of whom, Lewis said, "[were] firmly of the view that terminating or delaying the closing…could result in serious systemic harm."

The Fed denied they requested Lewis to keep quiet. Either way, Lewis obviously knew of the trouble by the December 17 meeting with the Fed, but didn’t report the losses publicly until Bank of America’s next earnings statement on January 16. That’s problematic.

The WSJ Law Blog also flags another action, this one brought by Susman Godfrey, alleging the same, with a particular paragraph of interest in their complaint:

As reported in The Wall Street Journal, just three days after shareholders voted to approve the merger, on December 8, 2008, Merrill’s CEO John Thain addressed a meeting of Merrill’s Board of Directors. Thain reported that Merrill suffered significant losses in November, which Thain described as one of the worse months in Wall Street history. Despite the size of these losses, Thain told Merrill’s board the losses were in line with BOA’s estimates. Neither BOA nor Merrill, nor any of the Individual Defendants, ever disclosed any such estimates . . . to their shareholders in the Proxy Statement. Likewise, no loss estimates were disclosed in any subsequent filings.


  • September 15 — Deal is reached. BoA and ML get to work on details.
  • October 31 — Proxy statement issued to shareholders (you can find it here) in conjunction with the special meeting.
  • December 5 — Special meeting of shareholders, who vote to approve the deal.
  • December 8 — Thain tells ML board of significant losses in November, losses "in line with BOA’s estimates."
  • "Mid December" — Lewis learns of ML’s losses.
  • December 17 — Lewis meets with Bernanke and Paulson
  • January 16 —  BoA discloses losses to shareholders.

Lewis & Thain’s stories are not consistent. Either:

  1. BoA didn’t provide ML estimates like Thain suggested;
  2. Lewis didn’t know about BoA’s own estimates, even though Thain did; or,
  3. Lewis knew sbout ML’s losses sometime significantly before December 8.

The plaintiffs are betting on #3, though they could make hay out of #2. It’s hard to see how anyone could sue for #1 — the BoA deal was the best thing that could have happened to ML, without which ML probably would have collapsed.

Of course, there’s another issue here: both Bank of America and Merrill Lynch were effectively insolvent throughout the plaintiffs’ class period. Both are completely dependent upon emergency government policies to stay operating, and the government has already stepped in to convert the messy merger into a complicated loan and guarantee program.

That is to say, anyone who bought shares of Bank of America in this time frame knew they were buying an effectively insolvent company, and the damages of the Merrill transaction may be, at most, to rearrange the form of Bank of America’s insolvency — possibly to its advantage.

(If you’re not familiar with Section 14(a) shareholder class actions, there’s a little background below the fold.)


The claims arise under Rule 14a-9, promulgated under Section 14(a) of the Securities Exchange Act of 1934.

No solicitation subject to this regulation shall be made by means of any proxy statement, form of proxy, notice of meeting or other communication, written or oral, containing any statement which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact, or which omits to state any material fact necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of a proxy for the same meeting or subject matter which has become false or misleading.

Bolding mine; that will be the crux of their claim. There does not seem to be any evidence that Bank of American knew the extent of Merrill Lynch’s losses when it negotiated the merger nor when it issued the relevant proxy statement. Presumably, had Bank of America known the extent of the losses then, it likely would have demanded a lower price or would’ve called the whole thing off.

Then question is thus: when did Bank of America learn of Merrill Lynch’s real problems, and when did BoA have a duty to reveal the losses?

That itself reveals a conceptual problem with securities cases in general. Rule 14a-9, like most securities regulations, creates a duty for companies to update their old statements as new information becomes available. Contrast that with some of the language contained in the registration statement itself:

The ability of either Bank of America or Merrill Lynch to predict results or the actual effects of its plans and strategies, or those of the combined company, is subject to inherent uncertainty. Factors that may cause actual results or earnings to differ materially from such forward-looking statements include those set forth on page 23 under “Risk Factors,” as well as, among others, the following:
     •   those discussed and identified in public filings with the SEC made by Bank of America or Merrill Lynch; …
   •   the extent and duration of continued economic and market disruptions and governmental regulatory proposals to address these disruptions;
   •   the merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events;

The "Risk Factors" similarly notes:

The opinions obtained by Merrill Lynch and Bank of America from their respective financial advisors will not reflect changes in circumstances between signing the merger agreement and the merger.

(Emphasis in original).

So to reword our question above: when did Bank of America have a duty to update a statement about the merger agreement it had previously warned would not be updated prior to the merger? Did it ever have that duty?

If, say, Lewis really didn’t know of ML’s losses until after the December 5 vote, what duties would it have with regard to updating the proxy statement it specifically issued for that vote? Why, for example, would it be wrong for BoA to wait until its next earnings statement to reveal the newfound losses?

Just a tip of the iceberg in the complicated world of securities regulation…