Tuesday, June 5, 2012

BOA duped its SHs on advice of counsel

This is what lawyers do when preparing the proxy statement in advance of a merger or acquisition: sit around taking about the various aspects of the deal's likely costs to the company, and make decisions about what has to be disclosed and how to write the disclosure in such a way as to prevent setting off any alarm bells, in other words, how to sugarcoat as much as possible all the risks involved at the time the proxy will be released.  The interests of the underwriters and the executives are well represented in these conversations; the shareholders are not.  The SEC requires the executives to disclose anything that is material.  What does that mean?  Anything that is likely to have a significant impact?  No, that's too broad.  Anything that will probably have a significant impact?  How probable does it have to be?  The conversation focuses on the relative probabilities and significance of various possible scenarios. At the end of the day lawyers try to include as little info as possible while staying on the right side of the SEC.  BOA is back in the news because its shareholders are saying that in its presentation of the Merrill deal it strayed well past the line, on advice from Wachtell.

"The bank’s purchase of Merrill, struck during the depths of the financial crisis, was the culmination of an acquisition binge by Mr. Lewis that transformed Bank of America from its base in North Carolina into a financial behemoth that could compete head-to-head with the biggest institutions on Wall Street. 
But the transaction, which was ultimately encouraged by government officials who were concerned about the impact on the financial system of a foundering Merrill Lynch, also saddled the bank with billions in losses and required an additional $20 billion from taxpayers on top of an earlier bailout it received in 2008.
Bank of America officials declined to comment. Andrew J. Ceresney, a lawyer for Mr. Lewis, also declined to comment on the filing, but he referred to a motion filed on behalf of Mr. Lewis on Sunday contending that the former chief executive did not disclose the losses because he had been advised by the bank’s law firm, Wachtell, Lipton, Rosen & Katz, and by other bank executives that it was not necessary."
Ryan Chittum comments that he'd like to see some follow-up stories that "focus on just how lawyers could advise that not disclosing billions of dollars in new losses was okay."

The SEC has already said that it was not ok; see Exhibit A.   BOA paid a $33 million fine to the SEC.  This is a tiny sum compared to the billions at stake in the deal; Chittum calls it a slap on the wrist and he's not alone in that characterization.   Of course BOA neither admitted nor denied wrongdoing in accepting the SEC fine, so it remains for a court to decide in this private action what executives and underwriters should have disclosed to the shareholders contemplating the proposed Merrill acquisition.

This is about as clear an illustration as it gets regarding the many problems of flexible disclosure rules and the high cost of information asymmetry.  

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