BofA lawsuit centers on secrets at Merrill
The Schwab S&P 500 Index investment fund filed a multibillion-dollar lawsuit against Bank of America (BAC) and its former CEO Ken Lewis this week, claiming the bank's former leadership hid losses at Merrill Lynch from shareholders and made material misrepresentations about Merrill before acquiring the investment bank three years ago. In their capacity as shareholders, the Schwab S&P 500 plaintiffs, and several other similar Schwab funds, claim the bank's leadership failed "to communicate with BofA shareholders" about details of Merrill's financial situation and the government bailout funds that made the merger possible. In the suit, the Schwab S&P 500 claims "the defendants obtained shareholder approval for the merger based upon materially false and misleading statements and omissions of material fact in the proxy statement and related solicitation materials." The plaintiffs in the action filed in the United States District Court of Northern California alleged that BofA's Ken Lewis realized prior to the merger that Merrill's losses were larger than expected. Yet, the plaintiffs claim Lewis went ahead with the transaction even after contemplating the filing of a material adverse change (MAC) clause to stop the deal. The suit goes on to claim Fed officials and Treasury Secretary Hank Paulson played a key role in Lewis' final decision. The complaint alleges Lewis backed away from filing a MAC clause after speaking to then Treasury Secretary Hank Paulson and the Federal Reserve. Instead of backing out, the complaint says Lewis "agreed not to invoke the MAC," it reads. "Instead, he agreed to proceed with the merger on the condition that the U.S. Government provide BOA with a $138 billion taxpayer bailout, consisting of a highly dilutive $20 billion capital infusion and an asset guarantee of $118 billion." The suit alleged Lewis concealed the government's infusion of cash from shareholders and investors. It claims that in a December 22, 2008 e-mail to the board, Lewis said he had a desire not to disclose the government infusion of capital prior to the merger. The complaint says Lewis wrote,"I just talked with Hank Paulson. He said there is no way the Federal Reserve and the Treasury could send us a letter of any substance without public disclosure which, of course, we do not want." Write to Kerri Panchuk.