Do Angered BofA Investors Have a Claim Over the Merrill Deal?

[WSJ_law_blog]

Yesterday, we took a look at whether Apple investors have a legitimate legal gripe over the apparently contradictory disclosures they got regarding the “Steve Jobs Health” factor.



Merrill Lynch Chairman and CEO John Thain, left, and Bank of America Chairman and CEO Ken Lewis, Sept. 15, 2008. (AP)

Now, let’s turn to the plight of Bank of America investors, who currently hold a stock that’s gotten absolutely schmeistered since the bank’s September 15 agreement to buy Merrill.

Today, the Journal reports that BofA swung to a fourth-quarter loss after accepting $20 billion in aid from the U.S. government to help it digest the toxic assets of its latest purchase, Merrill Lynch. This comes after yesterday’s Journal report that BofA was seeking billions from the U.S. Treasury in order to remain well-capitalized enough to buy Merrill. “Discussions over these funds began in mid-December when Bank of America approached the Treasury Department,” wrote the Journal. “The bank, already the recipient of $25 billion in committed federal rescue funds, said that it was unlikely to complete its Jan. 1 purchase of the ailing Wall Street securities firm because of Merrill’s larger-than-expected losses in the fourth quarter, according to a person familiar with the talks.”

Some believe that, when BofA shareholders voted on the deal on December 5, they might’ve appreciated knowing about Merrill’s larger-than-expected fourth quarter losses and, perhaps, that BofA CEO Ken Lewis would need to return to the bailout trough.

Yet, Lewis has been all reassurances. On the day of the vote, he said BofA would have “the premier financial-services franchise.” Even when the deal closed on Jan. 1, Lewis remained positive, saying: “We are now uniquely positioned to win market share and expand our leadership position in markets around the world.” (For more on BofA statements and analyst comments made between the September 15 agreement and post-close, head to Deal Journal.)

This morning, in a conference call, Lewis rejected the suggestion that he and his team did not conduct enough due diligence before buying Merrill, saying forecasts did not suggest Merrill’s assets would drop so suddenly in value. “We did not expect the significant deterioration in mid to late December that we saw,” he said on the analyst call.

The Law Blog spoke to Gordon Smith, a securities law prof at BYU Law School. The legal standard, he told us, is whether they lied to their shareholders or failed to tell them anything that, if left out, makes what they said false or misleading.

“These things are always really fact specific,” said Smith. “It comes to down to what they knew when they knew it. To the extent they knew Merrill was in worse shape than they thought, then they have to tell shareholders that. Based on news reports, I think it’s clear that what they didn’t say is that the numbers coming out of Merrill were more negative than originally thought, which is what prompted Lewis to go back to D.C. If they realized this before the vote, it seems like something they should have told the shareholders.”

This is a lawsuit !!!

Ken Lewis was on 60 Minutes after the first bailout. He said BofA was fine and didn’t even need the money, but they were told by Paulson it was their patriotic duty to take it. Hard to believe they can make the case a couple of months later that they need significantly more.

Although I understand the rationale, I think this was a rush deal at the urging of the Fed. Proper due diligence could not have been had. It’s tough to know what they knew, when they knew it when there isn’t any time to even open the books for close scrutiny.

Seems weird to me that they can buy Merrill and not have the money to do so. Shouldn't the diligence process have revealed what was the true cost?