Bank of America Corp. agreed today to a $2.43 billion settlement to end a class-action suit filed by its own shareholders. The suit stemmed from claims the company did not warn shareholders of overwhelming losses Merrill Lynch & Co. was suffering before they voted to purchase the firm for $18.5 billion in January 2009. In essence, current investors will be paying the settlement to 2008 stockholders.
Bank of America prepared its purchase of Merrill Lynch the same September 2008 weekend that Lehman Brothers collapsed. Investors claim officers did not disclose the financial woes of Merrill Lynch when they voted on the purchase the following January.
Ohio Attorney General Mike DeWine, a plaintiff on behalf of two of Ohio’s public pension funds, said Bank of America did not advise investor’s the full extent of Merrill’s 2008 fourth-quarter losses.
“There was general reference to losses, but never was the magnitude of those losses disclosed,” DeWine said in a Columbus news conference. “This would be akin to telling someone to watch out for a pothole, when they were about to fall into the Grand Canyon.”
After the transaction was approved, Bank of America disclosed Merrill’s $27.6 billion in losses, which greatly impacted the company’s financial difficulties, leading to an additional $20 billion government bailout. Bank of America had previously received $25 billion in government funds—$15 billion itself and $10 billion provided to Merrill.
Bank of America denied the shareholders’ claims, stating the settlement was offered to reduce costs related to the lawsuit and end the ongoing petition.
“Resolving this litigation removes uncertainty and risk and is in the best interests of our shareholders,” Bank of America CEO Brian Moynihan said in a statement. “As we work to put these long-standing issues behind us, our primary focus is on the future and serving our customers and clients.”
Investors were pleased with the outcome of their suit.
“We are very pleased that the settlement will recoup a substantial portion of the losses incurred by (Bank of America) shareholders,” Brian Guthrie, executive director of the Teacher Retirement System of Texas, said in a statement. “The magnitude of the recovery reinforces the important role that pension funds play when they serve as lead plaintiffs in securities actions.”
The class-action suit was not the first of Bank America’s legal woes relating to the Merrill Lynch acquisition. In 2009, it paid a $150 million settlement to the Securities and Exchange Commission related to charges it misled shareholders when purchasing Merrill Lynch. The SEC charged Bank of America did not disclose to investors its authorization to Merrill to pay up to $5.8 billion in bonuses to its employees despite posting a $27.6 billion loss in 2008.
The bank’s legal troubles are not over, either. It still faces a civil fraud suit brought by the state of New York for not disclosing the Merrill Lynch losses and bonus authorizations.
Bank of America will pay $1.6 billion in litigation fees in the third quarter, according to a statement issued by the company. Analysts are forecasting a 17 cents per-share loss for the bank in the third quarter.
