New York Attorney General Andrew Cuomo threatened on Tuesday to file charges accusing top Bank of America Corp executives of failing to disclose essential details about its takeover of Merrill Lynch & Co.
In a letter to the bank, Cuomo's office also contended that executives were so worried about Merrill's swelling losses that they sought guidance prior to a December 5, 2008 shareholder vote on the merger over whether the bank could back out.
The largest U.S. bank has said it threatened invoking its contractual right to back out following the shareholder vote, but went through with the merger under regulatory pressure.
Tuesday's letter also said Bank of America cannot hide behind attorney-client privilege without revealing the substance of its lawyers' advice.
The law is clear that Bank of America and its officers cannot assert an advice of counsel defense for their decisions, and at the same time persist in refusing to disclose the substance of the conversations with counsel, wrote David Markowitz, chief of Cuomo's investor protection bureau.
The Charlotte, North Carolina-based bank was given until September 14 to disclose the information to Cuomo or else individual Bank of America officers could be charged.
Cuomo's threat could complicate the bank's efforts to cement its $33 million settlement with the U.S. Securities and Exchange Commission over charges it failed to properly disclose it authorized Merrill to pay $3.6 billion of bonuses.
U.S. District Judge Jed Rakoff has twice rejected the civil settlement, and ordered Bank of America and the SEC to make new submissions by Wednesday.
Chief Executive Kenneth Lewis and other executives have said they relied on counsel for decisions not to disclose some information about the merger, which closed on Jan 1. Greater disclosures could add fuel to some of the many investor lawsuits over the merger.
Bank of America spokesman Scott Silvestri said the bank has not asserted an advice of counsel defense, and has maintained that its disclosures complied with applicable law.
JUDGE ALSO CRITICAL
In Tuesday's letter, Cuomo accused Bank of America of withholding information on its right to back out of the merger; the bonus payments; Merrill's $15.8 billion fourth-quarter loss and a more than $2 billion write-down for subprime mortgages.
He accused the executives of using attorney-client privilege as a sword and a shield: by saying they relied on lawyers for their decisions, but then invoking the privilege to prevent investigators from determining who decided what.
We cannot simply accept Bank of America's officers' naked assertions that they sought and relied on advice of counsel in good faith, and that, therefore, they should not be charged, Markowitz wrote.
Rakoff, too, has faulted the SEC for appearing to let the bank off too easily, and dismissed as nonsensical why Bank of America would agree to the $33 million penalty without admitting it had done anything wrong.
If the company does not waive the privilege, the Manhattan judge wrote last month, the culpability of both the corporate officer and the company counsel will remain beyond scrutiny. This seems so at war with common sense.
Also on Tuesday, Texas' securities commissioner said Bank of America agreed to pay up to $26.5 million in a settlement with seven U.S. states that resolves allegations Merrill allowed unregistered sales personnel to sell securities.
Bank of America shares fell 7 cents to $17.02 in Tuesday trading on the New York Stock Exchange. They are down 49.6 percent since the merger was announced last September 15, the same morning Lehman Brothers Holdings Inc went bankrupt.
(Reporting by Jonathan Stempel; Additional reporting by Elinor Comlay and Grant McCool; Editing by Ted Kerr, Leslie Gevirtz)