Compliance April 6, 2009

Merrill Lynch Settles Company Stock Lawsuit

A federal judge has given preliminary approval to a proposed $75 million deal to settle claims Merrill Lynch violated its fiduciary responsibilities by keeping company stock in its retirement plans when its mortgage-related losses made it no longer prudent to do so.
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Lawyers for the participants in the Merrill Lynch plans announced the deal that is scheduled for a final court consideration at a July 27, 2009 court hearing.

The settlement comes after a number of individual suits against Merrill Lynch were consolidated into one case, which focused on an 80% decline in the value of Merrill stock in the retirement plans between September 30, 2006 and December 31, 2008.

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The plans involved in the court action are:

  • the Merrill Lynch & Co., Inc. 401(k) Savings and Investment Plan,
  • the Merrill Lynch & Co., Inc. Retirement Accumulation Plan, and
  • the Merrill Lynch & Co., Inc. Employee Stock Ownership Plan

According to Monday’s announcement, the $75 million (minus attorney’s fees, administrative expenses, and other charges) will be allocated to plan account(s) of members of the class whose plan account(s) suffered losses as the result of investing in Merrill Lynch stock during the class period.

The plaintiffs charged that having company stock in the plans was no longer prudent because, by June 29, 2007, the company had accumulated at least $43 billion of net exposure to “risky and illiquid’ collateralized debt obligation (CDO) securities and subprime mortgages, which was greater than the company’s total equity value of $42 billion at that time.

According to plaintiffs’ court documents, “Merrill Lynch’s Company stock was not a suitable investment for the retirement accounts of its employees due to Merrill Lynch’s reckless business practices, including wagering the entire book value of the franchise on securities that were risky, illiquid and highly correlated. Merrill Lynch’s rush into the uncharted waters of purchasing and holding CDO and subprime related securities exposed the Company to unacceptable levels of risk…’

Court documents in the case related to the settlement are available here and the settlement agreement is available here.

Compliance April 6, 2009

Congressman Asks SEC to Investigate BofA Bonuses

Congressman Dennis Kucinich (D-Ohio) on Monday urged the U.S. Securities and Exchange Commission (SEC) to determine if Merrill Lynch bonuses violated securities laws, according to a news report.
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In a letter to SEC Chairwoman Mary Schapiro, Kucinich asked that the SEC look at whether Bank of America Corp. (BofA) violated securities laws by not disclosing Merrill Lynch & Co.’s plan to pay $3.62 billion of bonuses to top executives, Reuters reported. The bonuses are currently under investigation by New York Attorney General Andrew Cuomo (see “Cuomo Says Merrill Accelerated Bonus Payments’).

Kucinich said in his letter there were “significant questions” surrounding BofA’s failure to disclose bonus details before shareholders voted on the bank’s acquisition of Merrill last December 5, according to the news report.

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He asked the SEC to decide whether the bank’s actions constituted a “material” omission, and whether it might order the bank, prior to its April 29 annual meeting, to provide to shareholders the agreement containing bonus details, according to Reuters. In a March 29 response to an inquiry from Kucinich, BofA said it disclosed everything that was required prior to the shareholder vote—and that it was not required to disclose details it then knew about the size and timing of the bonuses.

“There is no question that any reasonable Bank of America shareholder would have considered the Merrill bonuses to be material to their decision on whether to approve the merger,” wrote Kucinich, chair of the House Domestic Policy Subcommittee. “It is the SEC’s responsibility to investigate and prosecute such abuses.”

Recent news reports found that some Bank of America shareholders are trying to oust BofA CEO Kenneth Lewis and two other board members for not protecting the interests of shareholders during the purchase of Merrill Lynch, including by misleading and not providing proper disclosure to shareholders (see “Some BofA Shareholders Want Lewis Out’).

Other Letters

According to his Web site, Kucinich sent out a round of letters to top Treasury officials last week, questioning how much they knew about bonuses paid to Merrill Lynch. Kucinich said the payouts made up more that 36% of the Troubled Asset Relief Program (TARP) funds the financial institution received from the Federal government.

BofA has received an additional $20 billion from TARP funds, in addition to the $25 billion it already received.

Kucinich said that “unlike AIG, the bonuses were not locked in by preexisting contracts and were performance bonuses, as opposed to retention bonuses.’

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