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.
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Oh, what a tangled web we weave …….
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?
A brief comment to be taken for what it’s worth: I’m not particularly disturbed about Roth’s seeming lack of research. He’s been doing the job for years & years, and so I’m sure he knows the standards for materiality by heart. That would make additional research on the issue unnecessary.
Put another way, I’ve been doing commercial litigation for many, many years. I know the legal standards for preliminary injunctions and summary judgment inside and out. Even in the biggest case in the world, those standards don’t change. If I were working under time constraints, I’d only need to do additional research for (a) most recent cases, or (b) nifty quotations to be drawn from factually similar cases. Doing more would be an inefficient use of resources.
And as for backing down… ultimately, it’s the client’s call. One can advise the client of the adverse consequences of a course of action, but it’s up to the client to evaluate whether the risks are worth it.
— ET!
Ummm…no.
I experienced this attitude amongst colleagues almost every day when I was a lawyer. It happens to other professionals as well.
Experience and intelligence are no substitute for careful thought, careful consideration and a careful rechecking of what you *think* you know. It is overconfidence that puts intelligent, experienced people into situations that make them look like fools. Beware of overconfidence. It will eventually be your doom.
ZeroHedge has a related article about a suit against Ken Lewis wherein his defense lawyers will call Sec Paulson and Chairman Bernanke as witnesses. If it goes to trial (big if), whatever material information they had will undoubtedly be swept under the nearest rug by a compliant/complicit AG or judge and classified in the bogus interest of national security.
http://www.zerohedge.com/article/ken-lewis-about-drag-down-bernanke-and-paulson-him
Here’s more on the firing, from the NYT in November:
http://dealbook.blogs.nytimes.com/2009/11/16/congress-digs-deeper-into-bofa-merrill-deal/?scp=1&sq=congress%20digs%20deeper%20into%20merrill&st=Search
The hearing is likely to focus on the legal advice the bank received when Merrill hit trouble late last year, and the bank’s former general counsel, Timothy J. Mayopoulos, will also testify. Mr. Mayopoulos was mysteriously fired in December.
Mr. Mayopoulos addressed his dismissal in his prepared testimony to the House Committee on Oversight and Government Reform, saying:
“The H.R. representative came in and gave me the severance papers and took my corporate ID card, company credit card, BlackBerry and office keys. He reiterated that I could not take anything with me and that my personal effects would be sent to me. He then escorted me to the executive parking garage. I got in my car and drove home. I was stunned. I had never been fired from any job, and I had never heard of the general counsel of a major company being summarily dismissed for no apparent reason and with no explanation.”
Mr. Mayopoulos also plans to say he told bank executives in early December that he did not believe the bank could back out of its deal with Merrill. In legal terms, he said he did not believe there was a material adverse change that would allow the bank an exit.
having read ‘The Big Sellout’ over Christmas, I was struck by the chaotic, venal (or worse) governance of these bloated FI’s. Now this. Appalling.
btw:
http://opinionator.blogs.nytimes.com/2010/02/04/mystery-men-of-the-financial-crisis/?hp
This is funny:
http://www.zerohedge.com/article/ken-lewis-about-drag-down-bernanke-and-paulson-him
White also said that despite the initial problems with the merger-including the mounting losses that led to the government bailout-the merger has turned out to be an “unmitigated success for BofA.” Merrill Lynch trading operations, like the trading operations of the other big banks, have taken advantage of historically low interest rates and borrowing costs to earn billions of dollars in profits, helping the banks to smoothe out losses from consumer and commercial real estate loans that continue to mount as economic conditions remain weak.
So here’s Lewis’ own lawyer publicly admitting that any Merrill “profits” are utterly fraudulent and represent only Bailout loot and premiums, while in its “real” functions it’s in the red and in the real world it’s insolvent.
Ah yes, ‘an “unmitigated success for BofA.”’ —echoes of Wiley Coyote’s “sheer unadulterated genius.” I smell bonus time, and an involuntary poke for taxpayers.
So all profits from trading are “utterly fraudulent”? That, of course, is utterly ridiculous — but not at all surprising coming from a Zerohedge reader. Is it possible for any trading profits to be legitimate when the Fed slashes rates to fight a recession? Or is it all one giant conspiracy that only
nutjobsenlightened folk like yourself can see?Don’t look now, buddy, but I think you missed your stop for Crazytown.
It’s not my stop.
But if I’m ever there I’ll look you up. You and everyone else who thinks casino “trading” has any legitimate place at all, whatever the Fed rate.
And of course we know damn well the Fed didn’t do anything it did to “fight a recession”, but to facilitate looting, like Merrill’s trading.
King Ben told Prince Ken to buy Merrill.
Ken bought Merrill.
Don’t go against daddy, whatever your GC says.
No wonder Judge Rakoff was so adamant about denying approval to the agreement between BofA and the SEC.
He musta smell the rat(s) from his bench, no doubt about it.
Now we are only waiting for civil charges against Bernanke and Paulson. Plus a full blown investigation on SEC settlements during the last decade which include criminal settlements that hurted shareholders while allowing investment bankers to get away with their pockets full. Just like during the Internet bubble with all the corruption to get IPOs that ended up with a 10MMUSD settlement from SEC.
Go Judge Jed S. Rakoff!!! Avenge the American people!
Odd how the key Wachtell lawyers, Ed Herlihy and Nick Demmo suddenly disappear. They were the focus back in the early fall when Rakoff went on the warpath. Now, curiously, they are absolved of blame.
Herlihy has always been aggressive about non-disclosure, precedents be damned.
Wachtell is a fly-by-night operation that only gets bailed out because its relationships are bigger than the rule of law. Who cares what the SEC says when Chris Dodd and Paulson are in your corner…
(Wachtell gave Dodd huge donations during his vanity campaign for prez)
And who pays the SEC fine for screwing the shaeholders…
THE SHAREHOLDERS
“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?”
Allow me to try to answer that question.
One of the things wrong with our institutions is that corporations use breaking the law as a competitive advantage, their lobbyists to change the law and insert tailor made loopholes, and their lawyers to back them up. That’s my personal view of the system we call representative democracy.
Its all Alice in Wonderland.
Look at Timmy reading a book about GATT (his primary research and experience) when he is sent by finance honchos to make adjustments to the treaty to add finance services. No representative government here.
A rather rotten kettle fish this. Or, perhaps a kettle of rotten fish. Yes I think the latter.
If $20 billion in losses is not material, I doubt that anyone knows what is material.
I wonder if as a society we should consider laws that attribute joint and several liability to corporate officers and managing directors? That is what the Cuomo suit is doing, it is imposing joint and several liability by asserting fraud and missrepresentation.
Now, an important aspect of all of this is the SEC settlement of its civil charges. WHY HAS THERE BEEN NO ACTION BY THE JUSTICE DEPARTMENT??????