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N.Y. Attorney General Cuomo charges Bank of America with fraud

By Zachary A. Goldfarb and Tomoeh Murakami Tse
Washington Post Staff Writer
Friday, February 5, 2010; A12

New York Attorney General Andrew M. Cuomo filed fraud charges Thursday against Bank of America and two of its former top executives, alleging that they lied not only to investors but also to government officials who were orchestrating a massive bailout of the bank in the final months of 2008.

The company and two former executives -- chief executive Kenneth D. Lewis and Chief Financial Officer Joseph Price -- were accused of misleading federal officials about the size of losses at Merrill Lynch, the troubled investment bank that Bank of America was in the process of buying. The lawsuit alleges that the deception was part of a successful effort to trick the officials into providing an additional infusion of bailout money.

Cuomo also charged the bank and the former executives with lying to investors about mounting financial losses at Merrill Lynch and concealing billions of dollars in bonuses paid to employees. The bank and executives denied the charges.

Bank of America separately agreed to pay $150 million to settle two earlier lawsuits brought by the Securities and Exchange Commission charging that the company lied to shareholders. The SEC's legal action, which was less aggressive than Cuomo's, did not include fraud charges and cleared individual executives of wrongdoing.

Cuomo's lawsuit raises the prospect that senior federal officials, both former and current, could be called to provide courtroom testimony for the first time about their role in rescuing the financial system. The lawsuit names former Treasury secretary Henry M. Paulson Jr., Federal Reserve Chairman Ben S. Bernanke and other federal officials as participants in discussions about the merger between Bank of America and Merrill Lynch.

These officials have already been called before a congressional committee looking into the deal. Some lawmakers have said the officials, who were worried that the U.S. economy would be in peril if the deal fell through, conspired with company executives to hide information that Bank of America was required to disclose under federal securities laws.

The officials have said they did nothing wrong.

Long-running inquiries

The actions taken Thursday represent the culmination of long-running investigations by Cuomo, the Securities and Exchange Commission, and the Treasury Department's special inspector general for the financial bailout, Neil Barofsky.

"Bank of America, through its top management, engaged in a concerted effort to deceive shareholders and American taxpayers at large," Cuomo said. "They committed an enormous fraud, and American taxpayers ended up paying billions for Bank of America's misdeeds."

Bank of America first settled SEC allegations by agreeing to pay $33 million last summer. But a federal judge rejected the settlement, saying it left too many questions unanswered, punished the very shareholders who were injured and let top executives off the hook.

The SEC announced Thursday that the bank has now agreed to pay $150 million to settle the charges and make a host of changes in how the company is run. The agency said it would come up with a plan to ensure that the money goes to injured investors. A judge must still sign off on the agreement.

The new fraud charges, however, may complicate matters. The SEC had said in previous court filings that it could find no evidence that executives at Bank of America did anything illegal. Cuomo's suit says the opposite.

"We're proceeding with the case. . . . The SEC is settling," Cuomo said. When you settle a case, "the upside is you implement immediate regulatory reforms. . . . Our case I believe will bring individuals to justice. . . . The downside of a litigation is it often takes time. . . . When you put both together, it's a comprehensive approach."

The Bank of America case is the first major legal case to stem from the unprecedented response -- involving mergers and government intervention -- to the breakdown of the financial system in fall 2008.

Questions about Merrill

Cuomo's allegations turn on the question of whether bank executives recognized the size of Merrill Lynch's losses before or after Bank of America shareholders approved the merger. Cuomo's complaint says that the bank and Price, in particular, "knew or were reckless or negligent in not knowing" that Merrill's losses had reached at least $16 billion by the end of the day on Dec. 5, when shareholders voted on the deal. Bank executives did not report such losses before the vote, depriving shareholders of information they needed to evaluate the merger, the attorney general said.

The lawsuit also claims that bank executives told the federal government less than two weeks later that they were considering pulling out of the merger because of surprisingly large losses at Merrill Lynch that had come to light only after the shareholder vote. But from Dec. 5 to Dec. 17, when Bank of America officials told the government that they might back out, Merrill incurred an additional loss of just $1.4 billion, the complaint alleges.

Cuomo said the bank's expressions of concern were a ploy to win more government assistance. Federal officials were eager to see the merger proceed, since it could help stabilize the financial system.

"Bank of America and its officials defrauded the government and taxpayers at a very difficult and sensitive time. There was a perception that the financial system was teetering. And I believe Bank of America officials exploited this fear," Cuomo said.

In a statement, Bank of America said that it was pleased with the SEC settlement but that "we find it regrettable and are disappointed that the [New York Attorney General] has chosen to file these charges, which we believe are totally without merit."

A lawyer for Lewis called the fraud suit a "badly misguided decision without support in the facts or the law," and a lawyer for Price called the allegations "false."

The fraud charges come after Cuomo's investigators took more than 75 days of testimony from Bank of America and Merrill Lynch officials and reviewed more than 1 million documents, according to David Markowitz, the special deputy attorney general who heads Cuomo's investor protection division.

Tse reported from New York.

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