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:

• Shortly before the shareholder vote, Price ignored a warning from the bank’s Corporate Treasurer, Jeffrey Brown, who told Price that, “I didn’t want to be talking [about Merrill’s losses] through a glass wall over a telephone.”
  
  
• The bank’s management failed to tell shareholders that it was allowing Merrill to pay $3.57 billion in bonuses. The amount, criteria, and timing of the bonus payments were omitted from the proxy. The bonuses were distributed in a manner that was completely inconsistent with Merrill’s prior practice, and in the worst year in Merrill’s history.
  
  
• The bank’s management did not tell the bank’s lawyers about the full extent of Merrill’s losses before the shareholder vote. For example, the bank’s former General Counsel, Timothy Mayopoulos, was intentionally mislead about the size and nature of Merrill’s losses. After the shareholder vote, when Mayopoulos learned of the actual losses, he attempted to confront Price but was summarily terminated.
  
  
• In the course of the Attorney General’s investigation, Lewis and other executives misled investigators about their conduct during and after the shareholder vote.

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.