Bank of America Corp
The proposed class-action accord is one of the largest settlements of investor claims against banks over seemingly safe mortgage-backed securities that later proved toxic as credit and housing conditions worsened.
It is also the latest step in Bank of America's efforts to address its legal liabilities stemming from its purchases of Merrill in January 2009 and the mortgage lender Countrywide Financial Corp six months earlier.
Bank of America is based in Charlotte, North Carolina, and is the second-largest U.S. bank by assets.
Lawrence Grayson, a bank spokesman, declined to comment on the settlement. Lawyers for the investors were not immediately available to comment.
The settlement resolves claims by investors, led by the Public Employees' Retirement System of Mississippi pension fund, that Merrill misled them about the risks of $16.5 billion of mortgage-backed securities in 18 offerings made between 2006 and 2007, before Bank of America bought the company.
The investors said their damages could total billions of dollars, citing a consultant's estimate.
Bank of America did not admit wrongdoing in agreeing to settle. Its shares rose 9 cents to $5.88 in morning trading.
RAKOFF TO RULE
Reuters in mid-November reported the size of the settlement, citing an unnamed source.
The settlement was disclosed publicly late Monday night in court papers filed in U.S. District Court in Manhattan. The accord requires approval by Judge Jed Rakoff.
Rakoff last week rejected a $285 million settlement between the U.S. Securities and Exchange Commission and Citigroup Inc
It is unclear whether the judge might apply similar reasoning in the Merrill settlement, which could result in disruptions to other private mortgage securities litigation. The government is not part of the Merrill settlement, which resolves private litigation.
His perspective is different because he doesn't have to look at the public interest, said J. Robert Brown Jr, a professor at the University of Denver's Sturm College of Law.
I don't expect him to be particularly bothered by the absence of an admission, Brown added. He'll review the substance and determine whether the terms are reasonable for the class.
COUNTRYWIDE, INDYMAC, NEW CENTURY
Investors alleged that Merrill's offering documents misled them about the quality of loans backing their investments, including that they complied with underwriting guidelines.
They also said the investments did not deserve their original investment-grade ratings, being backed by loans from such lenders as Countrywide, Merrill's First Franklin Financial unit, and the now-bankrupt IndyMac Bancorp Inc and New Century Financial Corp. Most later fell to junk status, they said.
The case is separate from litigation over Countrywide mortgage debt being handled by a Los Angeles federal judge.
It is also separate from Bank of America's proposed $8.5 billion settlement with investors in 530 mortgage trusts with $174 billion of unpaid principal. That accord was negotiated by Bank of New York Mellon Corp
The case is Public Employees' Retirement System of Mississippi et al v. Merrill Lynch & Co et al, U.S. District Court, Southern District of New York, No. 08-10841.
(Reporting by Jonathan Stempel in New York; Additional reporting by Alison Frankel; Editing by Derek Caney and John Wallace)