Merrill Losses Were Withheld Before Bank of America Deal

By GRETCHEN MORGENSON

Days before Bank of America shareholders approved the bank’s $50 billion purchase of Merrill Lynch in December 2008, top bank executives were advised that losses at the investment firm would most likely hammer the combined companies’ earnings in the years to come. But shareholders were not told about the looming losses, which would prompt a second taxpayer bailout of $20 billion, leaving them instead to rely on rosier projections from the bank that the deal would make money relatively soon after it was completed.

What Bank of America’s top executives, including its chief executive then, Kenneth D. Lewis, knew about Merrill’s vast mortgage losses and when they knew it emerged in court documents filed Sunday evening in a shareholder lawsuit being heard in Federal District Court in Manhattan.

The disclosure, coming to light in private litigation, is likely to reignite concerns that federal regulators and prosecutors have not worked hard enough to hold key executives accountable for their actions during the financial crisis.

The filing in the shareholder suit included sworn testimony from Mr. Lewis in which he concedes that before Bank of America stockholders voted to approve the deal he had received loss estimates relating to the Merrill deal that were far greater than reflected in the figures that had appeared in the proxy documents filed with regulators. Shareholders rely on statements made in proxy filings to decide whether to approve transactions their companies have proposed, and companies must disclose all facts that could be meaningful for shareholders trying to decide how to vote on a deal.

The bank’s purchase of Merrill, struck during the depths of the financial crisis, was the culmination of an acquisition binge by Mr. Lewis that transformed Bank of America from its base in North Carolina into a financial behemoth that could compete head-to-head with the biggest institutions on Wall Street.

But the transaction, which was ultimately encouraged by government officials who were concerned about the impact on the financial system of a foundering Merrill Lynch, also saddled the bank with billions in losses and required an additional $20 billion from taxpayers on top of an earlier bailout it received in 2008.

Bank of America officials declined to comment. Andrew J. Ceresney, a lawyer for Mr. Lewis, also declined to comment on the filing, but he referred to a motion filed on behalf of Mr. Lewis on Sunday contending that the former chief executive did not disclose the losses because he had been advised by the bank’s law firm, Wachtell, Lipton, Rosen & Katz, and by other bank executives that it was not necessary.

In a deposition taken on March 27 of this year, Mr. Lewis discussed the tumultuous period between the announcement of the merger in September 2008 and the shareholders’ vote on the deal on Dec. 5, 2008.

The suit, filed on behalf of Bank of America shareholders, asserts that the bank’s executives misled them by not disclosing Merrill’s mounting mortgage losses in proxy documents recommending approval of the deal.

For example, the proxy statement estimated that the purchase of Merrill Lynch would reduce earnings by only 3 percent in 2009, would not hurt the bank’s profits in 2010 and might actually add a bit to them.

Mr. Lewis echoed this view at the meeting where shareholders voted on the deal. When asked whether the transaction would dilute Bank of America’s earnings in coming years or add to its income, he referred the questioner to the proxy statement.

But in sworn testimony taken in the case, Mr. Lewis testified that by the time shareholders voted, the merger’s effect on Bank of America’s profit outlook had changed. According to the court filing, Mr. Lewis confirmed that the bank “expected the merger to be more than 13 percent dilutive in 2009 and 2.8 percent dilutive in 2010.”

Asked by Steven B. Singer, a lawyer at Bernstein Litowitz Berger & Grossmann who represents the plaintiffs, whether the figures shareholders had received in the proxy statement were no longer accurate on the date of the merger vote, Mr. Lewis said: “They were not those numbers, no.”