Compliance February 3, 2009

Stock-Drop Suit Hits BoA over Countrywide, Merrill Deals

Bank of America (BoA) was hit with a participant stock-drop suit alleging the company’s acquisitions of Countrywide Financial Corp. and Merrill Lynch left BoA exposed to ‘toxic’ subprime mortgage-related assets.
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BoA employee Vernon C. Dailey’s brought the suit, which seeks class action status and charges that the plan kept company stock as a 401(k) investment option beyond the point when it was still prudent to do so.

According to the complaint, throughout the suggested class period from January 11, 2008, to the present, the plan included stock as an investment option and the plan held over $3 billion in BoA stock, which represented nearly 32% of the plan’s total investments as of December 31, 2007.

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Dailey alleged in his lawsuit that BoA breached its Employee Retirement Income Security Act (ERISA) fiduciary duties by making misrepresentations about the company’s failure to adequately assess the merits of BoA’s acquisition of both Countrywide and Merrill.

“[T]he plan’s fiduciaries knew or should have known that, as a result of the acquisition of these two toxic “black boxes,’ the financial health of BOA was in serious doubt and that allowing Plan Participants to continue to invest their retirement savings in BOA stock in the wake of these acquisitions was imprudent,” the complaint said.

Mortgage Business

Dailey alleged in the suit that BoA’s Countrywide acquisition in January 2008 catapulted BoA from the fifth largest mortgage originator and sixth largest mortgage to the top of both originating and servicing lists when the U.S. housing market had begun its collapse.

Also, the complaint alleged that BoA only carried out two days worth of due diligence for its agreement to acquire Merrill for $50 billion worth of BoA stock.

Shortly after the Merrill acquisition, BoA announced it would be required to accept money from the federal government’s bailout package in exchange for preferred stock of the company. BoA claimed the federal bailout was necessary to “backstop future losses” on $118 billion in “toxic assets” it had acquired primarily from Merrill’s portfolio.

The defendants breached their fiduciary duties by encouraging BoA workers to put money into BoA stock and failing to give the employees accurate information about the “grave risks posed by BoA’s reckless acquisitions of Countrywide and Merrill Lynch,” the lawsuit alleged.

The case is Dailey v. Bank of America Corp., S.D.N.Y., No. 1:09-cv-00851-JGK.

Products February 3, 2009

Morningstar Extends Star System to Europe, Asia

Morningstar, Inc., has announced plans to provide what it calls "investor-centric, analyst-driven qualitative research and ratings" for European and Asian funds.
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The new ratings and accompanying analyst research reports complement the quantitative Morningstar Rating for funds (often referred to as its “star rating”) to help provide investors and their advisers with a tool to compare, screen, and research funds. Morningstar aims to rate and report on 3,000 funds in Europe and Asia, which would increase the total number of funds worldwide for which the company provides written analyses to more than 5,000.

According to a press release, the new ratings and research offer “forward-looking insight and assumptions” into how a fund might behave under different market conditions and are based upon fundamental criteria such as expenses, manager experience, and investment approach. Morningstar does not charge fund groups to be rated, nor can it commission research—the decision to report on a fund is driven by investor interest and analyst discretion, according to Morningstar.

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Ratings System

The new Morningstar Qualitative Rating for funds will be issued as one of five ratings—Elite, Superior, Standard, Inferior, or Impaired—based on the analyst’s conviction in the fund’s ability to outperform its peer group over the long term, according to Morningstar. Along with the qualitative rating, Morningstar will issue a detailed Morningstar Fund Research Report, which contains:

  • the rationale behind the qualitative rating
  • the analysts’ thoughts on the fund manager and team
  • an overview of the fund’s investment process and portfolio positioning
  • an examination of the fund company and incentive structure
  • an evaluation of the fund’s performance and expense structure.

These qualities are examined within the context of Morningstar’s Five Pillars of fund research—People, Parent, Process, Performance, and Price—and each, according to the press release, is supported by detailed analytics, operational data, and performance illustrations.

Morningstar clients will be able to access the new ratings and research through Morningstar Adviser Workstation; Morningstar Direct, its flagship institutional platform; Morningstar Workstation, and across its various retail Web sites.

 

More information about the Morningstar Qualitative Ratings and Research is available at http://global.morningstar.com/uk/qualrating.

 

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