Bank of America announced Friday that it would pay $2.43 billion to settle a class action lawsuit related to its acquisition of Merrill Lynch, as the legal woes continue for the financial institution.
In 2009, shareholders accused Bank of America of making false and misleading statements about the health of the two companies. In part, the plaintiffs accused Bank of America of hiding a major loss at Merrill Lynch just shortly before shareholders were set to vote on the deal.
While Bank of America denied the allegation, it said it decided to settle to put the litigation to rest. As part of the proposed settlement, Bank of America also agreed to improve its corporate governance policies.
"Resolving this litigation removes uncertainty and risk and is in the best interests of our shareholders," Brian T. Moynihan, the bank's chief executive, said in a statement. "As we work to put these long-standing issues behind us, our primary focus is on the future and serving our customers and clients."
Early in the financial crisis, Bank of America looked to be one of the winners. As other banks struggled to stay afloat, the firm swooped in to buy Countrywide Financial, the mortgage lender, in 2008. Later that year, Bank of America agreed to purchase Merrill Lynch, the beleaguered investment bank.
But both deals are proving to be a legal albatross.
Countrywide's mortgage problems have weighed on profits for a while. In the second
Now, it faces a similar burden from the Merrill Lynch deal. Bank of America said it would take a $1.6 billion hit related to the settlement and other legal expenses. The institution also agreed to enhance its corporate governance, including those related to "say on pay" shareholder votes, the independence of the board's compensation committee and policies for committees focused on acquisitions.
The settlement won't be the only black mark on the bank's financials this quarter. On Friday, the company said that profit would be hurt by a $1.9 billion adjustment related to the value of its debt. It also faces an $800 million charge related to an income tax expense.
In all, Bank of America said earnings would be cut by 28 cents a share. The company is set to report earnings Oct. 17.
The class action lawsuit stems from Bank of America's disclosures surrounding its acquisition of Merrill Lynch.
When Bank of America first announced the deal to buy Merrill Lynch for $50 billion in September 2008, the firms crowed about creating a company unrivaled "in its breadth of financial services and global reach." Bank of America executives emphasized Merrill's "great global franchise" and its extensive network of financial advisers. The company said the deal would bolster earnings by 2010.
At a Dec. 5 shareholder meeting to vote on the deal, Bank of America continued to focus on the positives. Kenneth D. Lewis, then Bank of America's chief executive, reiterated the profit expectations laid out in the initial release, according to the lawsuit.
But plaintiffs alleged that Merrill's financial health had deteriorated significantly by that point. Just days before the shareholder meeting, Merrill was expected to report a fourth-quarter loss of at least $16 billion, the lawsuit noted.
"Prior to the vote, these losses forced BoA to take significant actions that severely impaired Merrill's and the combined company's ability to generate earnings in future years," according to the lawsuit.
The problems eventually surfaced. As the financial crisis dragged on, Bank of America was forced to take two bailouts from the government, with problems largely stemming from the Merrill Lynch and Countrywide deals.