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Bank of America settles suit over Merrill Lynch for $2.4 billion

BofA agrees to settle an investor lawsuit accusing it of understating the financial decay at Merrill Lynch when the bank acquired the giant investment house during the financial crisis.

September 29, 2012|By E. Scott Reckard, Los Angeles Times
  • A Bank of America branch in New York's Times Square. BofA has agreed to spend $2.4 billion to settle an investor lawsuit over its acquisition of Merrill Lynch during the financial crisis.
A Bank of America branch in New York's Times Square. BofA has agreed… (Stan Honda, AFP/Getty Images )

Clearing one major thorn from its thicket of legal problems, Bank of America Corp. agreed to spend $2.4 billion to settle an investor lawsuit accusing it of understating the financial decay at Merrill Lynch & Co. when it acquired the giant investment house during the financial crisis.

"Our primary focus is on the future," Chief Executive Brian Moynihan said in a statement Friday, admitting no wrongdoing and explaining that the giant Charlotte, N.C., bank just wanted to end the costs and uncertainties of the class-action suit.

Although sizable, the settlement is far less than BofA has agreed to pay for other legal claims. Those include $11.8 billion for the bank's botched handling of troubled mortgage borrowers and foreclosures, and $8.5 billion for investors demanding that BofA buy back soured mortgage bonds issued by Countrywide Financial Corp., the Calabasas home lender it also acquired as the financial crisis set in.

The agreement may offer limited consolation for longtime shareholders who saw the bank's stock value top $240 billion in September 2006, then tumble to less than $50 billion in 2009. BofA's market value Friday was about $95 billion.

Many of the bank's troubles stem from the decision by Moynihan's predecessor, Ken Lewis, to press ahead with his takeovers of Merrill and Countrywide even as the collapse of the subprime mortgage market cost both firms billions of dollars.

When Lewis announced in September 2008 that BofA would buy Merrill for $50 billion in stock, the firms claimed that the merger would create a financial services behemoth that would return huge profits by 2010. By Jan. 1, 2009, when the acquisition closed, the shares' value had slumped to $19.4 billion.

The investor class-action lawsuit, filed in federal court in Manhattan, alleged that Merrill's financial health had deteriorated significantly by that point. Just days before a meeting at which shareholders were to vote on the deal, Lewis knew that Merrill was expected to report a fourth-quarter loss of at least $16 billion, the lawsuit said.

"Prior to the vote, these losses forced BoA to take significant actions that severely impaired Merrill's and the combined company's ability to generate earnings in future years," according to the lawsuit.

The problems eventually surfaced, and as the financial crisis dragged on, Bank of America was forced to take two bailouts totaling $45 billion from the government, with problems largely stemming from the Merrill Lynch and Countrywide deals.

The settlement announced Friday also requires BofA to make changes in its corporate governance that the plaintiffs said would make it more accountable to shareholders. Plaintiffs included institutional investors, including the Ohio retirement systems for public employees and teachers, who claimed that BofA had misled them.

"Investing involves risk," Ohio Atty. Gen. Mike DeWine said in a statement praising the settlement. "But investors, whether pension funds or individuals, expect companies to provide accurate information so they can judge that risk."

Bank officials said the vast majority of investors had, like DeWine, accepted the settlement, which must be approved by U.S. District Judge Kevin Castel in Manhattan. But at least one high-profile investor decided not to participate and to pursue legal claims separately.

"We opted out," said Jonathan Finger, a past Moynihan critic who runs a Houston financial firm with a major investment in BofA.

Finger declined to discuss Merrill on Friday, and a BofA spokesman said Moynihan wouldn't comment beyond the bank's statement.

BofA's remaining legal problems include a $10-billion lawsuit filed by giant insurer American International Group Inc., which seeks to reclaim losses on mortgage securities, and a bitter dispute with Fannie Mae. The giant mortgage buyer's requests that BofA repurchase billions of dollars in flawed home loans became so demanding that the bank has stopped doing any new business with Fannie Mae.

Wall Street had expected earnings of 14 cents a share when BofA reports its third-quarter financial results Oct. 17. But the bank said the cost of the Merrill Lynch settlement, along with large charges related to how its debt and British tax liabilities are accounted for, would sharply cut into its results, leaving analysts to project big losses instead.

JMP Securities analyst David Trone, estimating the loss at 17 cents a share, said the Merrill Lynch settlement was far larger than expected "given the weak merits of such suits and historical precedence."

But Rochdale Securities analyst Richard X. Bove remained a fan of BofA, saying its stock is undervalued. The shares fell 14 cents, or 1.6%, to $8.83 on Friday. Bove said the settlement and accounting adjustments "do not impact operating results," which are improving, he wrote, "and are not likely to require any capital raising effort by the bank."

Unlike BofA's mortgage operations, which have run up more than $40 billion in losses since the Countrywide acquisition, Merrill Lynch is a winner, Bove said in an email.

"Over time, Merrill will be the dominant player" in BofA operations, he said. "It has proven to be a very positive investment with significant benefits to the bank."

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