Kenneth D. Lewis, outgoing chief executive of Bank of America Corp., addresses… (Jason Miczek / Bloomberg )
Reporting from New York — Former Bank of America Chief Executive Ken Lewis now holds the inglorious distinction of being the first top figure from a major bank to be sued by the government over the financial industry's debacle of the last 18 months.
The New York attorney general's office Thursday accused Lewis, the bank and another former top official of fraud in connection with Bank of America Corp.'s acquisition of investment bank Merrill Lynch & Co. at the height of the financial crisis.
Bank of America and its top executives misled the government and its shareholders about the size of Merrill Lynch's losses, according to the civil lawsuit filed in New York state court.
Atty. Gen. Andrew Cuomo accused the bank of failing to disclose $16 billion in losses to win shareholder approval of the deal; then overstating the losses to federal authorities to secure $20 billion from the government's bailout fund.
"The conduct of Bank of America, through its top management, was motivated by self-interest, greed, hubris and a palpable sense that the normal rules of fair play did not apply to them," the complaint stated.
The lawsuit thrusts the bank and Lewis more directly into the spotlight among those being held accountable for the meltdown of the economy.
"In the wake of the financial crisis, we have not had many litigated outcomes," said John Coffee, a Columbia University law professor. "This is one of the few enforcement cases that really goes to the behavior of these individuals and firms during the financial meltdown."
The bank, Lewis and Joe Price, the former chief financial officer, disputed Cuomo's allegations. Lewis' lawyer, Mary Jo White, said, "There is not a shred of objective evidence to support the allegations." A bank spokesman said the claims "are totally without merit."
Lewis stepped down as chief executive at the end of December. Price is now the president of consumer and small business banking.
The bank eventually received $45 billion in TARP payments, all of which has since been paid back.
The purchase of Merrill Lynch, completed Jan. 1, 2009, has been a legal and financial headache for Bank of America. The Securities and Exchange Commission brought two civil actions against the bank, accusing it of wrongdoing in the acquisition. One suit was filed last summer and the other last month.
As Cuomo did, the SEC argued that the bank had misled investors about the financial health of Merrill Lynch in order to win shareholder approval of the merger. The SEC also accused Bank of America of wrongfully approving $5.8 billion in bonuses for Merrill Lynch employees shortly after the acquisition closed.
But just minutes before Cuomo disclosed his lawsuit, the SEC announced that it had agreed with Bank of America to settle both cases. As part of the settlement, Bank of America agreed to pay $150 million and make several reforms.
Lawyers were skeptical about Cuomo's decision to pursue the same allegations the SEC did.
"The regulators are clearly not seeing eye to eye on this case," said Ron Geffner, a former SEC lawyer now at Sadis & Goldberg. "I would have thought that if New York feels there is enough to prosecute, why would the SEC not feel that."
In a news conference, Cuomo tried to present his case as working in concert with the SEC's settlement. He said that the SEC's settlement allows for immediate reform of the bank while his case will "bring people to justice."
"There was a perception that the financial system was teetering on the edge, and the Bank of America officials exploited this fear," Cuomo said.
The SEC has been criticized for failing to pursue its Bank of America cases more aggressively. When the agency sought an earlier $33-million settlement with the bank, U.S. District Judge Jed Rakoff wrote a scathing rebuke. Rakoff will have to approve the new $150-million settlement. A hearing is scheduled for Monday.
Some legal watchers said Cuomo's case answers a public desire to assign responsibility for the financial crisis.
"There's been a lot of talk, but there haven't been a whole lot of prosecutions," said Carl Tobias, a law professor at the University of Richmond. "Maybe Cuomo was just tired of waiting."
Lawyers in Cuomo's office said ongoing investigations could lead to additional legal action.