Suit settled by Bank of America for $2.4 billion
The price being paid by Bank of America for its missteps during the financial crisis rose sharply Friday, as the bank announced a $2.43 billion deal to settle accusations that it had misled investors about the acquisition of Merrill Lynch.
It is the largest securities classaction lawsuit settlement yet to arise from the financial crisis.
Shareholders — led by pension funds, including those in Ohio and the Netherlands — had accused the bank of providing false and misleading statements about the health of the Wall Street firm, which, unknown to the public, was racking up huge losses in late 2008 amid turmoil in the markets.
Bank of America denied the allegations, but said Friday that it had agreed to settle in order to put the case behind it. “Resolv-
ing this litigation removes uncertainty and risk and is in the best interests of our shareholders,” Brian T. Moynihan, the bank’s chief executive, said in a statement.
The settlement, however, may undermine a battle between the New York attorney general and the bank. In 2010, Andrew M. Cuomo, New York’s then-attorney general, sued Kenneth D. Lewis, the bank’s former chief executive, and Bank of America, contending that the bank and its executives hid from shareholders billions of dollars in losses at Merrill, later causing Bank of America to need a bailout from Washington.
The case, which now falls to Eric Schneiderman, could lose much of its steam. Under a decision by New York’s highest court, the attorney general can recover losses on behalf of shareholders. Once the shareholders settle, though, Mr. Schneiderman’s office can expect to obtain little more than a penalty, according to people briefed on the matter. The attorney general’s office declined to comment.
The huge size of the settlement underscores how two deals in 2008 — the Merrill acquisition and the purchase of the mortgage lender Countrywide Financial earlier that year — have weighed on the bank, one of the nation’s largest, keeping it from making a full recovery.
The Countrywide acquisition, made as the housing market was cratering, has now cost Bank of America more than $40 billion in losses on real estate, legal costs and settlements, according to several people close to the bank. That deal alone would have been enough to hobble Bank of America, but coupled with the questionable acquisition of Merrill Lynch, it nearly crippled the institution.
Since 2009, Bank of America has closed bank branches, sold billions of dollars in assets and cut tens of thousands of jobs.
For a federal securities class action, the size of Friday’s Merrill settlement is surpassed only by the Enron, WorldCom, Tyco and Cendant settlements, according to Joseph A. Grundfest, a Stanford University Law School professor of securities litigation.
Bank of America said Friday that the settlement would hurt its results for its current quarter. Profit will also be hurt by a $1.9 billion adjustment related to the value of its debt. And the bank faces an $800 million charge related to an income tax expense. All told, third-quarter earnings — to be reported Oct. 17 — would be cut by 28 cents a share, the bank said.
It is unclear how much relief shareholders — those who owned Bank of America shares or call options from September 2008 to January 2009 — will receive. A chunk of the settlement amount will go to the plaintiffs’ lawyers, who are expected to ask the court for $150 million in fees. Bank of America will use its litigation reserves and litigation expenses to cover the settlement, saying it and other legal expenses cost it $1.6 billion.
The bank also said Friday that it had agreed to adopt a “say on pay” shareholder vote, an independent compensation committee of the board and policies for committees focused on acquisitions, among other corporate governance changes.