Bloomberg has a useful but oddly-framed article up tonight: “Bank of America E-Mails Show Lehman Was Buy Target.” The story comes out of investigation by New York state attorney general Andrew Cuomo in Bank of America’s failure to disclose the deterioration in Merrill’s condition prior to the shareholder vote on the deal, but the bits I find most sensational come later in the story.
First, there was virtually no due diligence. This is inevitable in a rushed deal, but that sort of haste has consequences.
Second, not only did Merrill keep BofA’s CFO Joe Price apprised of the losses, but both the general counsel, Timothy Mayopoulos and the firm’s outside counsel, Wachtell Lipton, said they needed to be disclosed. So what happened?
An e- mail from Eric Roth, a partner at the bank’s outside law firm, Wachtell, Lipton, Rosen & Katz, sought research within his firm on “the duty to disclose,” according to the lawsuit.
Roth’s notes from a call with Wachtell Lipton partner Warren Stern say, “duty to bring to shareholders all info material to vote.” The firm told the bank it should disclose the losses, Cuomo claims.
The law firm was “marginalized” by the bank after that, choosing not to disclose, Cuomo claimed. Mayopoulos was later fired by Price and replaced by Brian Moynihan, who later became CEO, Cuomo said.
Yves here. This is as bad as it gets. Since when does a CFO have the authority to fire the general counsel? This looks awfully sus for a company in a regulated business (ie, where the general counsel needs to wield a lot of clout). This. plus board member compliants about how the deal was handled, suggests BofA has some serious governance issues.
This is therefore unlikely to be the last bit of unflattering information that comes out of Cuomo’s probe.
Update: Hoisted from comments, from reader najdorf. I might have missed the significance of the part he highlights:
I read the AG’s full complaint and the part I found most disturbed wasn’t really in the Bloomberg article. The guy who looks most reasonable in the AG’s retelling is Roth, who researched disclosure and thought the losses probably ought to be disclosed (Mayopolous looks OK too, but I don’t understand how more information about his firing hasn’t come out). However, when the AG gets into describing Roth’s “research” that led him to think disclosure was probably necessary, it turns out that he literally ran two Lexis searches (which found twelve cases, of which he read substantially less than all) and asked if anyone at Wachtell had researched disclosure before. Someone gave him a 10-year-old memo that was pretty sketchy and then he concluded that the losses probably ought to be disclosed. Research complete. No real action taken.
This man is a partner at perhaps America’s #1 law firm, researching one of the largest bank mergers in U.S. history. Disclosure related to mergers is a fairly significant topic. When he went to look for information about it, he didn’t find too much, so he guessed that losing $10 billion was probably material. When no one listened to him, he backed off. And this was the MOST responsible and diligent person involved!!! I couldn’t believe it. I expect better from my 1L classmates. What is wrong with our institutions?
Update 1:11 AM: The Financial Times has some additional tidbits:
Mr Cuomo said BofA also overstated its ability to break off the deal as leverage to get $20bn in taxpayer money. The complaint seeks to force BofA and the two men to “disgorge all gains” and pay penalties and restitutions.
“We believe Mr Lewis and Mr Price understated Merrill Lynch’s losses to shareholders and then they turned around and overstated their ability to terminate their agreement to get $20bn from the federal government,” Mr Cuomo said….
The complaint specifically alleges that Mr Price misled BofA’s general counsel, Tim Mayopoulos, about the magnitude of Merrill’s losses in the fourth quarter of 2008, in order to get the lawyer to agree that the losses did not have to be disclosed before the shareholder vote.
When Mr Mayopoulos learned the size of losses after the vote and sought to confront Mr Price, he was fired and frogmarched from BofA’s headquarters, the complaint said.
You can read the compliant here. It’s actually pretty juicy and written in a forceful style. For instance, it points out several cases where BofA executives made claims that are just not credible. It also depicts BofA having pretended it could walk from the deal as a ruse to manipulate the Treasury into its January TARP infusion into BofA. Even if that was what the Charlotte bank was trying to sell, it does not appear the Treasury was buying; other news reports suggested they didn’t think BofA could break the deal. The reason for the additional funding presumably was that both Merrill and BofA were still losing money and looked wobbly; the threat appears to have been overkill that now has come back to bite Ken Lewis and his CFO Price.