SAN FRANCISCO — City officials sued the Bank of America on Thursday, claiming bank officials mishandled government bonds and deliberately covered up overcharges and other mistakes that may have cost cities across the state more than $100 million.
San Francisco is asking for at least $12 million in its lawsuit, which comes amid a two-year investigation by Atty. Gen. Dan Lungren into allegations by a variety of municipalities that the bank, among other things, failed to return payments for unredeemed bonds and charged for services that were not performed.
A spokesman for Lungren said an investigation is ongoing and the state is continuing to mediate the dispute. Los Angeles, which did most of its $1-billion bond business with Bank of America, has been monitoring the investigation and may receive additional reimbursements, city officials said. The amount is unclear.
Bank of America officials called the estimate of overcharges and other damages ludicrous and said they have been fully cooperating with San Francisco and the state.
The city of San Francisco had been part of the mediation but decided to join a 1995 whistle-blower suit filed against the bank by a former Bank of America vice president. City officials said they went to court because the talks had not been productive.
In the lawsuit filed in San Francisco Superior Court, city officials accused Bank of America of improperly keeping millions of dollars in unclaimed payments for unredeemed bonds, making unauthorized investments and engaging "in a massive cover-up" by destroying records and making false monthly reports.
"It is obviously a statewide problem," San Francisco City Atty. Louise Renne said in announcing the suit. "San Francisco is not the only public entity that has had bonds with Bank of America. . . . We clearly know there are other cities and counties that have to have been affected."
Before selling its trust division in 1995, Bank of America was one of the largest bond trustees in California, serving municipalities and agencies large and small. From 1990 to 1995, Bank of America's trustee division acted as trustee on more than 1,000 municipal and state bond deals in California, for a total of $27.4 billion of bonds, according to Securities Data Corp. in Newark, N.J.
Bank of America spokesman Peter Magnani confirmed that the bank is mediating a dispute with Lungren's office over the handling of unclaimed money in trust accounts that should have been turned over to the state. "We are pretty far apart on the dollar amount," Magnani said.
But he denied that the bank has engaged in a cover-up or made unauthorized investments. Bank of America has has already refunded about $5 million in overcharges to municipalities, he said. "We think that covers the full extent of the overcharge problem with interest," he said.
He declined to disclose the total amount in dispute, but insisted it will not be enough to affect stockholder decisions.
"When all is said and done, when you add up all the issues we have with the city and the state, we don't think it is material for us. . . " Magnani said. "People have been throwing around numbers today, and in our view" the amount is not big enough to affect an investor's decision to sell or buy stock, he said.
James Roethe, general counsel for Bank of America, stressed in an interview that bondholders were paid and public projects completed. "We have agreed to open up our books to an independent auditor . . . and to pay what they say," Roethe said.
The dispute stems from the 1995 whistle-blower lawsuit filed by Patrick Stull, a former vice president for corporate trust who left Bank of America in 1990. The suit was sealed while the attorney general investigated the allegations involving more than 1,000 municipal agencies across the state.
San Francisco decided to join the lawsuit because "we felt we needed to be involved in order to make sure we are made whole," said Deputy City Atty. Don Tickle. The city alleges the bank mishandled money from bonds issued for low-income housing, schools, fire protection and other public works. Statewide damages will probably be "well in excess of $100 million," Tickle said.
Jim Haydel, Stull's lawyer, said hundreds of millions of dollars are at stake in the dispute. Under the state whistle-blower law, Stull would receive a portion of any money the bank might be forced to pay.
A spokesman for Lungren refused to say whether he plans to join the whistle-blower suit. "It's an ongoing investigation and ongoing mediation," said spokesman Matt Ross.
Renne said San Francisco first learned of the problem in 1995 after Stull filed his suit. Shortly thereafter, San Francisco city departments began receiving checks from Bank of America in refunds for computer-generated mistakes. The checks ranged from $100 to $35,000 for a total of about $60,000, city officials said.
"We had started looking into it, and lo and behold, checks started coming to the departments," Renne said.