April 23 (Bloomberg) -- Bank of America Corp. Chief Executive Officer Kenneth D. Lewis failed to tell shareholders about mounting losses at Merrill Lynch & Co. because of pressure from federal regulators to complete the takeover, according to New York State Attorney General Andrew Cuomo.
Henry Paulson, who was Treasury secretary last December, may have threatened to remove the management and directors of the Charlotte, North Carolina-based bank if they didn’t comply, Cuomo wrote in a letter to Congress that was released today. Lewis also was told not to disclose his opposition to the Merrill deal because of “staggering” deterioration at the brokerage, or the regulator’s action, according to Cuomo.
Lewis and the board of the biggest U.S. bank by assets are under fire for not telling shareholders that New York-based Merrill’s fourth-quarter loss was spiraling toward $15.8 billion before they voted to approve the deal in December. Shareholders cast ballots April 29 on whether to re-elect directors including Lewis and split his roles as chairman and CEO. Some investors are calling for the 62-year-old Lewis, CEO since 2001, to resign.
Paulson kept the Securities and Exchange Commission, which is responsible for making sure companies disclose material information to their investors, in the dark, according to Cuomo.
“Question’s of Bank of America’s disclosures were left up to Bank of America,” Paulson said in a statement e-mailed to Bloomberg by Michele Davis, of the Brunswick Group, a corporate communications company.
Paulson said his discussions with Lewis “centered on the Fed lawyers’ opinion that the merger contract was binding, and the U.S. Treasury’s commitment to ensuring that no systemically important financial institution would be allowed to fail.”
‘Clear Violation’
The allegations in Cuomo’s letter suggest Paulson and other policymakers may have resorted to breaking securities laws in order to protect a fragile financial system, according to Peter Sorrentino, a senior portfolio manager at Cincinnati-based Huntington Asset Advisors, which has about $13.3 billion under management and doesn’t own Bank of America Corp. stock.
“Everyone involved knew that was a clear violation, that’s material non-public information, so basically we just closed the rule book during the crisis and said we don’t care, we need to keep the lights on, and we’ll deal with that manana,” Sorrentino said. “Logic went out the window and they were just acting out of fear,” he said. It was “completely panic mode.”
‘Largely Collaborated’
White House spokesman Robert Gibbs declined to comment on Cuomo’s letter, referring inquiries to the SEC. John Nester, a spokesman for the agency, declined to comment on whether the SEC plans to review Lewis’s actions. Cuomo shared his findings with SEC Chairman Mary Schapiro.
Lewis testified for four hours in Cuomo’s New York offices on Feb. 26 as part of an investigation by Cuomo of $3.6 billion in bonuses paid at Merrill just before it merged with the bank. Cuomo’s letter was based on recollections by Lewis of a Dec. 21 conversation with Paulson. The letter, addressed to lawmakers including Senate Banking Committee Chairman Christopher Dodd, Democrat of Connecticut, said Paulson “largely corroborated Lewis’s account.”
Lewis said he was instructed by federal officials not to disclose Merrill’s losses, his desire to back out of the merger or about the intervention of regulators, Cuomo’s letter said. Regulators were concerned about “systemic risk” that might lead to the collapse of financial markets, the letter said.
Put It in Writing
“The Treasury didn’t make them decide to buy Merrill Lynch and Treasury didn’t tell them how much to pay,” Jonathan Finger, whose family owns 1.5 million Bank of America shares, said in a phone interview today. “They are the only financial institution that painted themselves into a corner where it had to sacrifice shareholders for the good of the country.” Finger and his father, Jerry, are leading a campaign opposing Lewis’s re-election to the bank’s board.
Lewis testified that he asked Federal Reserve Chairman Ben S. Bernanke to “put something in writing” regarding the U.S. government’s plan to support Bank of America’s acquisition in view of Merrill’s mounting losses.
After Bernanke said he would consider the idea, Paulson called Lewis and said, according to Lewis, “First it would be so watered down, it wouldn’t be as strong as what we were going to say to you verbally, and secondly, this would be a disclosable event and we do not want a disclosable event.”
Board E-Mail
Attached to Cuomo’s letter today was a Dec. 22 e-mail from Lewis to his board. “I just talked with Hank Paulson,” the e- mail says. “He said that there was no way the Federal Reserve and the Treasury could send us a letter of any substance without public disclosure which, of course, we do not want.”
Bernanke didn’t advise the bank or Lewis on disclosure issues or request that the bank not reveal information, a government official said today on condition of anonymity. On occasions when the issue of disclosure arose, the Fed chief said the bank’s management needed to make its own decision with its own counsel on Bank of America’s obligations, the person said. and appropriately with regard to the Merrill Lynch transaction,” Scott Silvestri, a spokesman for Bank of America, said in a telephone interview.
Not Acceptable
Harvey Pitt, former chairman of the U.S. Securities and Exchange Commission, said in a Bloomberg Television interview that Lewis was obligated to make full disclosure to shareholders. Even if he was told not to make full disclosure, Pitt said, “that would not by itself justify his refusal.”
Pitt also said Lewis should have gotten any such instructions in writing. “At least he could have demonstrated he was acting at the request of an official of the U.S. government,” Pitt said.
John Coffee, a securities law professor at Columbia Law School in New York, also said it was not acceptable for Lewis to withhold material information from shareholders.
“The Securities and Exchange Commission is in a very difficult moment,” because it is under pressure to act if the agency believes Lewis withheld material information, Coffee said in a Bloomberg Television interview.
Former SEC Chairman Christopher Cox, who led the agency at the time Paulson was discussing the Merrill Lynch acquisition with Bank of America executives, declined to comment.
Schapiro, who succeeded Cox in January, has said the SEC is reviewing whether Bank of America violated the law by not disclosing to shareholders that Merrill Lynch employees were set to receive year-end bonuses that totaled $3.62 billion.
Cuomo is cooperating with U.S. Special Inspector General Neil Barofsky in a federal investigation of executive pay at banks that received money from the U.S. Treasury’s Troubled Assets Relief Program. Merrill and Bank of America have received about $45 billion in TARP money.
Bank of America also received $118 billion in loan guarantees to absorb potential losses from the Merrill acquisitions. The bank completed its acquisition of Merrill on Jan. 1.
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