The New York Times‘s Gretchen Morgenson has a big story today on how Bank of America fooled shareholders into approving its ill-fated merger with Merrill Lynch.
Former CEO Ken Lewis, the business genius who drove his bank into quasi-nationalization with two of the worst acquisitions of all time in Countrywide and Merrill Lynch, has testified in a civil suit that he and his executives misled shareholders on the Merrill deal, Morgenson reports. Lewis says that before shareholders voted to approve the deal, he and other executives knew Merrill’s losses had intensified dramatically and intentionally failed to inform them. He didn’t even tell his board of directors until after the vote.
Worse, Lewis, despite knowing that internal estimates predicted the deal would dilute 2009 earnings by 13 percent, told shareholders at the vote that it would be just a 3 percent dilution, and misled them that 2010 was expected to be accretive (add to profits) when he now knew it would not be.
It appears that if you can get a lawyer—any lawyer to bless something, you can get off the hook. Recall how Lehman Brothers shopped around until it found a London law firm willing to sign off on its Repo 105 book cooking. So no prosecutions.
Lewis says he didn’t inform shareholders “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 the NYT’s words. I’d like to see some follow stories focus on just how lawyers could advise that not disclosing billions of dollars in new losses was okay.
And do executives have to follow the law themselves even when given bad legal advice? Why should that allow Lewis to stand up at the shareholder meeting and knowingly give false numbers to voters?
Fortunately there’s a complication here on the launder-it-through-the-lawyers front for Lewis and Bank of America: Its own top lawyer, Timothy Mayopoulos, was left out of the loop at first and then when informed, tried to get the loss disclosed. He couldn’t even get a meeting with the CFO, Joe L. Price. Then:
The next day, the filing noted, Mr. Mayopoulos was “fired without explanation and immediately escorted from the premises, without being given the opportunity to collect his personal belongings.”
Not only that, but the company’s treasurer, Jeffrey J. Brown, told Price the CFO that he had to disclose the bigger losses. Not doing so “could be a criminal offense, stating that he did not want to be ‘talking through a glass wall over a telephone’ if no disclosure was made.”
Morgenson, rightly, points out up high that this will raise—yet again—the question of why there has been so little accountability for executives. But she doesn’t mention that this scandal has already been investigated by the SEC, which levied its usual slap on the wrist: A mere $33 million fine.
It’s revealing then that it’s taken private lawsuits to get this critical information when the government (which you should note urged Lewis to do the Merrill deal) has already supposedly investigated it.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.