Cuomo charges BofA, ex-CEO with fraud, SEC settles

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New York's attorney general charged Bank of America Corp, former Chief Executive Kenneth Lewis and former Chief Financial Officer Joe Price with fraud for allegedly misleading shareholders about the acquisition of Merrill Lynch & Co.

The US Securities and Exchange Commission separately said Bank of America agreed to pay a USD 150 million civil fine and bolster disclosure and governance practices to settle its two lawsuits alleging poor disclosure of Merrill's losses and USD 3.6 billion of bonus payouts. That accord requires court approval.

Invoking a powerful state law used to combat securities fraud, New York Attorney General Andrew Cuomo filed a civil lawsuit on Thursday accusing Bank of America, Lewis and Price of intentionally failing to disclose massive losses at Merrill prior to a Dec. 5 shareholder vote on the merger.

Cuomo also alleged that the defendants later misled the federal government in arguing that a "surprise" increase in Merrill's losses would allow Bank of America to back out of the merger if it did not get massive taxpayer help.

Merrill lost USD 15.8 billion in the fourth quarter of 2008, but Cuomo said just USD 1.4 billion surfaced between the Dec. 5 vote and when the bank began to raise alarms in Washington.

"The behaviour is just egregious and reprehensible," Cuomo said on a conference call. His office said the bank's current Chief Executive Brian Moynihan is not under investigation.

Moynihan took over when Lewis retired after four decades at the bank at the end of 2009; the lawsuit may distract him from efforts to improve performance. Price was last month named head of consumer, small business and card banking.

Bank of America took USD 20 billion of federal bailout money from the Troubled Asset Relief Program in mid-January 2009, two weeks after the merger closed. The Charlotte, North Carolina-based lender has since repaid that sum.

"Change is so obviously needed at Bank of America," lamented Neil Barofsky, the TARP special inspector general, on the conference call.

"SERIOUS BLOW"
Cuomo filed charges under the Martin Act, a New York law giving him extraordinary power in securities litigation and fighting financial fraud. The law dates from 1921, more than a decade before the SEC was created.

Lewis joins Countrywide Financial Corp's Angelo Mozilo among major U.S. financial services chief executives to face civil fraud charges by regulators over conduct since a global credit crisis began in roughly the middle of 2007.

The SEC charged Mozilo last June with securities fraud and insider trading over trading that took place mainly in 2007. Bank of America bought Countrywide in 2008.

Bob Stickler, a Bank of America spokesman, called Cuomo's charges "regrettable" and without merit.

"The evidence demonstrates that Bank of America and its executives, including Ken Lewis and Joe Price, at all times acted in good faith and consistent with their legal and fiduciary obligations," he said.

Lewis' lawyer Mary Jo White, a former US Attorney in New York and now a partner at Debevoise & Plimpton LLP, called the decision to sue "badly misguided," saying: "There is not a shred of objective evidence to support the allegations."

William Jeffress, a partner at Baker Botts LLP who represents Price, said his client also denies Cuomo's charges, and called "utterly false" the charge that Price deliberately encouraged the withholding of information from shareholders.

"This is a serious blow for the bank," said Tony Plath, a finance professor at the University of North Carolina at Charlotte. "This doesn't look like it's going to go away any time soon."

It is unclear how Cuomo's lawsuit might affect Price's consumer banking responsibilities. Like many rivals, the bank faces elevated credit losses in a weak economy, though the sums it has set aside for bad loans have begun to decline.

"Is Price now going to spend his time preparing his defence, instead of getting retail straightened out?" said Nancy Bush, a principal at NAB Research LLC.