By Karen Freifeld and David Scheer
Feb. 4 (Bloomberg) — Former Bank of America Corp. Chief Executive Officer Kenneth Lewis was sued by New York Attorney General Andrew Cuomo for defrauding investors and the government when buying Merrill Lynch & Co. The bank agreed to pay $150 million to settle a related lawsuit by U.S. regulators.
Cuomo also sued the bank’s former chief financial officer Joe Price and the bank itself for not disclosing about $16 billion in losses Merrill had incurred before it was bought by Bank of America in an effort to get the merger approved. Afterwards, Lewis demanded government bailout funds, Cuomo said.
“We believe the bank management understated the Merrill Lynch losses to shareholders, then they overstated their ability to terminate their agreement to secure $20 billion of TARP money, and that is just a fraud,” Cuomo said today at a press conference. “Bank of America and its officials defrauded the government and the taxpayers at a very difficult time.”
Cuomo is pursuing individuals at the bank while the U.S. Securities and Exchange Commission has declined to do so. The suit is being filed under the Martin Act, a New York securities law that permits both civil and criminal penalties.
Cuomo said he coordinated efforts with the SEC. “Our case will bring individuals to justice and will make a point to people that this is a very serious matter,” he said. “When you settle a case the way the SEC is settling today, the upside is you implement immediate regulatory reforms.”
Bank of America, based in Charlotte, North Carolina, is required to take seven steps in the next three years to bolster corporate governance and internal controls.

Lewis Retirement

Neil Barofsky, special inspector general for the Troubled Asset Relief Program, also joined in the investigation.
Bank of America was criticized by lawmakers and investors last year for allegedly leaving the public in the dark about Merrill Lynch’s mounting losses and potential bonus payments while seeking to complete the takeover. The uproar helped spur Lewis’s retirement last year.
SEC and New York officials said that current bank CEO Brian Moynihan played no part in the alleged misstatements and cooperated with their investigation.
The U.S. injected $45 billion into Bank of America through the purchase of preferred shares, including $20 billion approved after the acquisition in January 2009 to keep the deal from collapsing. The bank redeemed the shares in December.

Bank is Disappointed

“We find it regrettable and are disappointed that the NYAG has chosen to file these charges, which we believe are totally without merit,” the bank said in a statement. “In fact, the SEC had access to the same evidence as the NYAG and concluded that there was no basis to enter either a charge of fraud or to charge individuals. The company and these executives will vigorously defend ourselves.”
Cuomo said Bank of America scheduled a shareholder vote to approve its plan to buy Merrill on Dec. 5, 2008. However, by that date, Merrill incurred losses of more than $16 billion, Cuomo said. Bank of America’s management, including Lewis and Price, knew of the losses and that more were coming, Cuomo said.
After the merger was approved, Lewis told federal regulators the bank couldn’t complete the deal without a taxpayer bailout because of accelerated losses from Merrill, Cuomo said. However, between the time the shareholders approved the deal and the time Lewis sought the bailout, Merrill’s losses only increased by $1.4 billion, Cuomo said.

Greed, Hubris

“The conduct of Bank of America, through its top management, was motivated by self-interest, greed, hubris, and a palpable sense that the normal rules of fair play did not apply to them,” Cuomo said in the lawsuit. “Bank of America’s management thought of itself as too big to play by the rules and, just as disturbingly, too big to tell the truth.”
The suit, filed in New York state Supreme Court in Manhattan, seeks monetary relief and injunctions. David Markowitz, Cuomo’s special deputy attorney general for investor protection, said the suit came after 75 days of testimony and the review of more than a million documents. He said no monetary demand has yet been made yet.
The suit claims Bank of America received more than $20 billion in taxpayer aid as a result of their misleading efforts. Cuomo’s statement said the bank can’t explain why they didn’t disclose the losses to shareholders though the merger “would have threatened the bank’s very existence if there had been no taxpayer bailout.”

Merrill Bonuses

Cuomo also claims management failed to disclose to shareholders it was allowing Merrill to pay $3.57 billion in bonuses. Nor did the bank’s management tell the bank’s lawyers about the extent of Merrill’s losses before the shareholder vote.
Cuomo’s suit also alleges the bank’s former general counsel, Timothy Mayopoulos, was fired after he confronted Price after the shareholder vote when he learned of Merrill’s losses. Cuomo says Mayopoulos was intentionally misled beforehand.
The case is People of State of New York v. Bank of America, State Supreme Court (Manhattan).

To contact the reporter on this story: Karen Freifeld in New York State Supreme Court in Manhattan at +1-212-617-5387 kfreifeld@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at +1-212-617-1092 or drovella@bloomberg.net.

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