Friday, February 5, 2010

New York AG Andrew Cuomo Brings Civil Fraud Charges Against Bank Of America Executives

Yesterday, New York Attorney General Andrew Cuomo filed civil charges against former Bank of America CEO Ken Lewis, and a current Bank of America executive, Joe Price, who served as Chief Financial Officer under Ken Lewis. The civil charges relate to the controversial role that both men played in Bank of America’s merger with Merrill Lynch & Co.

In the Complaint, Cuomo alleges that Bank of America’s management team, namely Lewis and Price, understated losses at Merrill Lynch to get shareholders to approve of the transaction. Further, the Complaint alleges that the pair, Lewis and Price, overstated Bank of America’s desire to terminate the merger to federal regulators weeks later in order to force the federal government to offer Bank of America $20 billion in additional TARP aid. The Complaint makes the following specific allegations:

Despite the allegations of fraud leveled at Lewis and Price, the pair is sure to argue in their defense that they are blameless and the victims of a deteriorating economy and overall forces outside of their control. Recall, that in the only other fraud case against perceived initiators of the financial crisis, in a case involving Bear Stearns executives Mark Tannin and Ralph Cioffi, which I posted on earlier, that defense worked successfully. Under principles of indemnification, Bank of America is technically saddled with the financial burden of paying for the legal defense of Ken Lewis and Joe Price. Already, Lewis has hired Mary Jo White of the prominent firm Debevoise & Plimpton to represent him. White has gone on the record to indicate that Lewis has been “unfairly vilified” in a search for culprits in connection with the financial crisis.

This will be an interesting and intriguing case to watch. I’ll keep you posted.


  1. Professor Grant:

    Excellent post. How is this case different than the Bear Stearns situation that you outlined in your post? In other words is it any more likely that the BofA executives will be found guilty?

  2. If evidence exists that the executives of BofA violated the law by withholding information from shareholders then they should be prosecuted. Individuals should be held accountable for their actions.

    However, it is the shareholders of BofA that have been defrauded by this activity and it makes absolutely no sense to fine BofA since it is the shareholders who must pay the legal fees associated with any litigation and bear the burden of any fine imposed. This is probably why BofA agreed to settle the SEC complaint without admission of wrongdoing in order to "make the SEC go away."

    It will be interesting to see if Andrew Cuomo actually has a case, or if he's just another political hack like Eliot Spitzer.

  3. It would not surprise me if Bank of America were actually liable in this case. Needless to say, I have a personal grudge against Bank of America and large companies in general that exist in a "dog eat dog world." Nevertheless, if the executives of Bank of America breached their fiduciary duties to the shareholders they should be fined and not at the expense of the companies shareholders. I am definitely very interested to see how this case turns out.

  4. Karen Lander

    The suit in NY comes under the Martin Act. This act, unlike the federal suit by the SEC requires no showing of intent to defraud. Proof of false material disclosures to shareholders is sufficient to find liability. ( By dispensing with the element of intent the NY prosecution has a much stronger enforcement tool than the SEC. If federal legislation were as tough as the NY Martin Act it might create an added incentive for meticulous disclosure to shareholders.

  5. The Wall Street Journal lays waste to Andrew Cuomo's sanctimonious indictment of Bank of America Prosecutor, Charge Thyself, WSJ:

    HUD's Web visitors learn that in 1999 "Secretary Cuomo established new Affordable Housing Goals requiring Fannie Mae and Freddie Mac—two government sponsored enterprises involved in housing finance—to buy $2.4 trillion in mortgages in the next 10 years. This will mean new affordable housing for about 28.1 million low- and moderate-income families. The historic action raised the required percentage of mortgage loans for low- and moderate-income families that the companies must buy from the current 42 percent of their total purchases to a new high of 50 percent—a 19 percent increase—in the year 2001."

    It's a sign of Washington's continuing failure to examine its own failures that HUD still views such a policy as an "accomplishment." It's as if the Pentagon described Pearl Harbor as a victory.

    We know that in the wake of Mr. Cuomo's agitation, Fannie and Freddie's purchases of subprime loans skyrocketed. Subprime and "liar" loans became loss leaders that eventually caused the two mortgage giants to fail—with taxpayers so far on the hook for $111 billion in losses and perhaps hundreds of billions more to come.

    The problem wasn't merely that HUD under Mr. Cuomo was raising the volume of risky loans for which taxpayers were guaranteeing. HUD was also encouraging a dangerous decline in underwriting standards at these government-sponsored enterprises (GSEs). Says former Fannie Mae chief credit officer Edward Pinto, "HUD commissioned much research aimed at forcing the adoption of more flexible lending standards by the GSEs."

    Until the criminally incompetent are purged from government service, instead of charading in the role of "reformers", there can be no effective restructuring of the financial framework.

  6. This is certainly an interesting case that the government has taken on. In our present economic state, I have no resevations believing that BofA deliberately misled shareholder's about ML's losses. Many big corporations have take an approach that lead them to do unlawful things if they believe they will be able to get away with it. From a business perspective I can see why BofA did what they did. At a time where the government was bailing out financial institutions left and right, BofA figured why not capitalize and receive extra TARP money. Not to cast judgment too soon, I certainly think the government may have an interesting case on their hands to prove.

  7. GERMAINE ANTHONY AUSTINFebruary 15, 2010 at 12:37 PM

    This article is very interesting. I applaud the investigation and I think that Price and Lewis should have a better defense than being the "victims of a deteriorating economy." We are all victims of a deteriorating economy but that doesn't make fraud and deception acceptable. It would be interesting to know the development of this story, are we still in the allegation stage or do we have concrete evidence? In regards to the management failing to tell shareholders valuable information, why aren't the shareholders ready to file a derivative suit, isn't this the remedy that was designed to protect the interest of the shareholders. Although intriguing, this article is not surprising. Lewis and Price were trying to do everything necessary to increase the value of Bank of America. Today’s economy has the nation’s top executives and corporate management dipping their hands in the rotten candy jar, but at what cost. While tricking in fraudulent ways, they must have forgotten about the fiduciary duty they owe to the shareholders and I think they should be reminded, if the allegations are true.