Judge Castel Upholds Core Allegations in Bank of America Case

September 14, 2010

In his first decision in a securities fraud case of this magnitude, U.S. District Court Judge P. Kevin Castel issued a 140-page opinion on August 27, 2010, substantially upholding the Amended Complaint in In re Bank of America Corp. Securities, Derivative and “ERISA” Litigation, No. 09-MD-2058 (S.D.N.Y.).

The case arises out of Bank of America’s allegedly false and misleading statements and omissions in connection with its merger with Merrill Lynch (the “Merger”), which were revealed to the market in several corrective disclosures beginning on January 12, 2009 and ending on January 21, 2009.  Specifically, the Amended Complaint alleges, among other things, that Defendants violated the federal securities laws by misrepresenting or failing to disclose that BoA and Merrill had secretly agreed to allow Merrill to pay up to $5.8 billion in bonuses to its executives and employees; that Merrill had suffered losses in excess of $15 billion during October and November 2008 alone; and that BoA was only able to consummate the Merger because it received a $138 billion taxpayer bailout prior to the close of the Merger.

In his August 27 opinion, Judge Castel substantially upheld Lead Plaintiffs’ claims alleging: (1) securities fraud and false proxy statements related to Bank of America’s agreement to allow Merrill to pay up to $5.8 billion in discretionary bonuses to Merrill employees; (2) false proxy statements for failure to disclose Merrill’s fourth quarter 2008 losses; (3) false offering statements related to the secret bonus agreement with Merrill; and (4) control person liability with respect to these claims.

Specifically, the Court rejected Defendants’ arguments that the possibility of Merrill bonus payments with the “prior written consent” of Bank of America was an adequate disclosure concerning the bonus agreement because, “[w]hen the Joint Proxy was filed on October 31, 2008, the bonus payment to Merrill employees was more than hypothetical.”  (Opinion at 43.)  Indeed, Judge Castel found that “[i]f the ‘prior written consent’ had been given to make payments of up to $5.8 billion, a reasonable investor may well have considered that information important to both the purchase of shares and the granting or withholding of a proxy.”  (Id. at 44.)

Additionally, in rejecting Defendants’ arguments that they had adequately disclosed Merrill’s likely dire fourth quarter performance through various risk disclosures and projections, Judge Castel stated, “By the time the Joint Proxy issued, the stormy forecast for the fourth quarter was not merely a projection: the storm had arrived.  These losses were a known fact to company insiders, yet were not disclosed to BofA’s shareholders.”  (Id. at 58.)

Kaplan Fox is the court appointed co-lead counsel in the case against Bank of America.