A securities class action before Judge Castel accuses Bank of America, Merrill Lynch and certain officers and directors of securities fraud and related violations for failing to disclose, before the shareholder vote to approve the Bank of America-Merrill merger, that Merrill was expecting enormous losses for the fourth quarter of 2008 and that Bank of America and Merrill had agreed to set aside up to $5.8 billion for Merrill bonuses. The parties today cross-moved for summary judgment. The class plaintiffs (represented by Bernstein Litowitz) moved for partial summary judgment to establish that the pre-merger disclosures about the effect of the deal on earnings were both false and material:
As reflected in the contemporaneous emails of BoA’s most senior executives and in memoranda prepared in December 2008 by the Bank’s counsel, Wachtell, Lipton, Rosen & Katz (“Wachtell”), Merrill’s fourth quarter losses decimated the company’s capital position prior to the December 5 vote. As a result, by no later than November 26, 2008 — ten days before the vote — BoA was forced to take the drastic action of ordering Merrill to shrink its balance sheet by liquidating hundreds of billions of dollars of assets. According to the sworn testimony of BoA Treasurer Jeffrey Brown, this dramatic liquidation of Merrill’s assets reduced the combined company’s future earnings ability by at least $1 billion per year. As a Wachtell memorandum made clear: “The severe impact of these losses on MER’s financial condition going forward — and the financial condition of the combined company in the event the merger closed — cannot be overstated . . . . There is no question that [Merrill’s] massive capital burn stands to reduce the overall earnings potential of MER for years to come.”
Plaintiffs argue that they were injured directly because their right to cast an informed vote on the merger was impaired. Plaintiffs, however, have failed to show that the damages they seek are a measure of any alleged impairment to voting rights. Instead, plaintiffs demand the entire decline in BofA’s stock price following the purported corrective disclosures. But as holders of BofA stock, the Section 14(a) class members did not purchase BofA stock at artificially inflated prices. They thus did not sustain an out-of-pocket loss after the alleged corrective disclosures occurred and the purported artificial inflation dropped out of the stock price. The stock-price drop that the Section 14(a) class seeks to recover reflects the market’s diminished assessment of Merrill’s value to BofA as a merger partner — and Merrill, of course, was an asset that indisputably belonged to BofA. If BofA overpaid for Merrill, any resulting claim belongs directly to the Company and only indirectly to its shareholders.
Former CEO Ken Lewis (represented by Debevoise) moved for summary judgment on the theory that he reasonably relied on others — including his CFO and outside counsel at Wachtell — to make judgments about whether to disclose the earnings expectations:
[Mr. Lewis] did precisely what the CEO of a large enterprise should have done when faced with the prospect of large interim and forecasted losses at Merrill: he engaged on the question of disclosure with BAC’s CFO and received reports from BAC’s CFO that the question of disclosure had been vetted proactively with expert counsel on two occasions and that counsel had concluded that disclosure was not warranted. Mr. Lewis, who, like most CEOs, is a non-lawyer not steeped in the securities laws, did not overrule that determination and had absolutely no basis for doing so. Under such circumstances, Plaintiffs cannot sustain their burden of showing that Mr. Lewis knowingly, recklessly or even carelessly violated the U.S. securities laws. Indeed, to hold Mr. Lewis liable in these circumstances would set a novel and very troubling precedent, exposing CEOs to liability when they follow the reasonable judgments of their subordinates who opine and consult with counsel on complicated legal issues instead of imposing their own, less-informed will.
There were several other motions: Merrill (represented by Shearman & Sterling) incorporated Bank of America’s briefing. The outside directors (represented by Davis Polk) moved for summary judgment, essentially because they claim there is no evidence they knew about the earning expectations or the bonus agreement until after the shareholder vote. Former CFO Joe Price (represented by Baker Botts) moved for summary judgment on the bonus issue (not the earnings issue) because, among other reasons, he argues he did not know about the bonus agreement. Former Merrill CEO John Thain (represented by Dechert) moved for summary judgment because he claims to have had no involvement in drafting the disclosures at issue in the claims against him.