Cuomo sues Lewis of Bank of America… Did Lewis act unethically or is Cuomo grandstanding?

February 9, 2010

Reported on in Bloomberg…(see the full article here).

The former Chief Executive Officer of Bank of America, Kenneth Lewis was sued by New York Attorney General Andrew Cuomo for supposedly defrauding investors and the government when buying Merrill Lynch & Co.  Recently, the bank agreed to pay $150 million to settle a related lawsuit by U.S. regulators which is being considered by U.S. District Court Judge Jed Rakoff.  Last year, Rakoff called the SEC’s initial settlement neither fair nor reasonable and questioned why the bank’s executives and lawyers weren’t sued. The agency said it lacked evidence to bring claims against specific individuals.

Cuomo also sued the bank’s former chief financial officer Joe Price and the bank itself for not disclosing about $16 billion in losses Merrill had incurred before it was bought by Bank of America in an effort to get the merger approved.  Afterward, Lewis demanded government bailout funds, Cuomo said.

“We believe the bank management understated the Merrill Lynch losses to shareholders, then they overstated their ability to terminate their agreement to secure $20 billion of TARP money, and that is just a fraud,” Cuomo said yesterday during a telephone press conference. “Bank of America and its officials defrauded the government and the taxpayers at a very difficult time.”

Interestingly enough, Cuomo is pursuing individuals at the bank while the SEC has declined to do so. The suit is being filed under the Martin Act, a New York securities law that permits both civil and criminal penalties.

Cuomo said he coordinated efforts with the SEC. “Our case will bring individuals to justice and will make a point to people that this is a very serious matter,” he said yesterday. “When you settle a case the way the SEC is settling today, the upside is you implement immediate regulatory reforms.”

Last month, the SEC expanded its claims against the bank, accusing it of failing to disclose Merrill Lynch’s mounting losses before holding a shareholder vote on the acquisition.

The proposed fine would be distributed back to harmed shareholders, the SEC said yesterday.

The SEC settlement “addresses the judge’s concerns of penalizing shareholders so it’s likely to pass muster,” said Peter Henning, a law professor at Wayne State University in Detroit. “At the same time, it’s hard to show any monetary damage to shareholders at this point because the Merrill deal has turned out to be a good acquisition for the bank.”

The conduct of Brian Moynihan, the bank’s current chief executive, is not under investigation, said David Markowitz, Cuomo’s special deputy attorney general for investor protection. Moynihan, who became general counsel in the middle of events, was candid with Cuomo’s office in the probe, Markowitz said.

According to the complaint, Lewis and his lieutenants Moynihan and Price calculated that if they threatened “to get out of the deal, the federal government would counter with more taxpayer funds out of a concern for the greater economy.”

The U.S. injected $45 billion into Bank of America through the purchase of preferred shares, including $20 billion approved after the acquisition in January 2009 to keep the deal from collapsing. The bank redeemed the shares in December.

“We find it regrettable and are disappointed that the NYAG has chosen to file these charges, which we believe are totally without merit,” the bank said in a statement. “In fact, the SEC had access to the same evidence as the NYAG and concluded that there was no basis to enter either a charge of fraud or to charge individuals. The company and these executives will vigorously defend ourselves.”

Lawyers for Lewis and Price denied wrongdoing. “The allegation that Mr. Price deliberately caused Bank of America to withhold from shareholders information they were entitled to know is utterly false,” said William H. Jeffress Jr. and Julia E. Guttman of Baker Botts LLP in Washington, in a statement.

SOME QUESTIONS TO CONSIDER:

Is the decision to sue Mr. Lewis and other Bank of America Executives by Mr. Cuomo a political move that has more to do with advancing political aspirations than bringing justice?  Or, is Mr. Cuomo the only person to have the fortitude to bring justice to an unethical action by BofA executives?

“The decision by Mr. Cuomo to sue Bank of America, Mr. Lewis and other executives in connection with BofA’s acquisition of Merrill Lynch is a badly misguided decision without support in the facts or the law,” said Mary Jo White of Debevoise & Plimpton LLP in New York, who represents Lewis. “There is not a shred of objective evidence to support the allegations by the Attorney General.”

Bank of America agreed to buy Merrill on Sept. 15, 2008, after just 25 hours of due diligence, according to the suit. When the board of directors met that day to approve the transaction, they thought they were going to buy Lehman Brothers Holdings Inc., the suit says.

WOW…is that true?  If so, and it is proven, then one would have to wonder about not only Mr. Lewis actions, but the actions of the Board of Directors. Who makes a decision like this with only 25 hours of due diligence?

Cuomo said Bank of America scheduled a shareholder vote to approve its plan to buy Merrill on Dec. 5, 2008. By that date, Merrill incurred losses of more than $16 billion, Cuomo said. Bank of America’s management, including Lewis and Price, knew of the losses and knew that more were coming, Cuomo said.

After the merger was approved, Lewis told federal regulators the bank couldn’t complete the deal without a taxpayer bailout because of accelerated losses from Merrill, Cuomo said. However, between the time the shareholders approved the deal and the time Lewis sought the bailout, Merrill’s losses only increased by $1.4 billion, Cuomo said.

Greed, Hubris

“The conduct of Bank of America, through its top management, was motivated by self-interest, greed, hubris, and a palpable sense that the normal rules of fair play did not apply to them,” Cuomo said in the lawsuit. “Bank of America’s management thought of itself as too big to play by the rules and, just as disturbingly, too big to tell the truth.”

But wait…is Bank of America the only culprit in this grand scheme?  We (the taxpayers) lost substantially more with AIG, so where is Mr. Cuomo when it comes to that grand deception?  I respect the grandstanding claiming “greed and hubris” but I’m not sure why the BofA – Merrill merger is being focused on when there seems to be much bigger fish to fry.  Any help here?

The suit claims Bank of America received more than $20 billion in taxpayer aid as a result of their misleading efforts. Cuomo’s statement said the bank can’t explain why they didn’t disclose the losses to shareholders though the merger “would have threatened the bank’s very existence if there had been no taxpayer bailout.”

Cuomo also claims management failed to disclose to shareholders it was allowing Merrill to pay $3.57 billion in bonuses. Nor did the bank’s management tell the bank’s lawyers about the extent of Merrill’s losses before the shareholder vote.

Here’s what appears to be the sad truth…  Lewis will be defended by attorney’s for Bank of America.  BofA received bailout money.  Merrill is now part of BofA.  And, even if found guilty, more than likely any fines assessed will be paid from BofA’s insurance.  Perhaps…this is all posturing for something else.  Bank of America likely was wrong, but I’m not sure that Attorney General Cuomo is truly motivated by bringing justice…

But then again…I could be wrong.  YOUR THOUGHTS?

Advertisements

AIG Bonuses – Now Is Not The Time For Irresponsible Rhetoric Senator Grassley

March 16, 2009

aigthumb How many adjectives can we use to describe the feelings associated with the news that AIG paid $165 million in bonuses when the Federal Government spend over $170 Billion – yes, that is Billion, in bail out money to save the ailing giant?

There is outrage and many in government leadership are expressing their opinions about how they feel about the audicity of AIG to effect those payments.  That said, it is also important to make sure that leadership on both sides of the isle don’t get carried away with their comments.

CNN reported the following comments:

Republican Sen. Charles Grassley of Iowa didn’t appear to be joking, however, when he spoke with Cedar Rapids, Iowa, radio station WMT.charles-grassley

“I would suggest the first thing that would make me feel a little better toward them [AIG executives] is if they follow the Japanese example and come before the American people and take that deep bow and say, ‘I am sorry,’ and then either do one of two things: resign or go commit suicide,” he said.

“And in the case of the Japanese, they usually commit suicide.”

Now I know that emotions are high, but come on Senator Grassley – that is political rhetoric and frankly is uncalled for.  I can’t believe for a minute that Grassley would, in fact, want anyone to commit suicide.  After all – we are talking about money and money can be replaced – human life can’t.

Perhaps as the night wears on cooler heads will prevail.  The right and ethical thing to do is reconsider how and when bonuses should be paid to a company that – but for the help of the taxpayers – would be bankrupt and out of business.  Further, more – this whole scenario should serve as a less for other businesses that line up to receive their bailout money.

Bonuses should be paid for outstanding performance.  When performance is lacking and, in fact, when a company faces the very real possibility of not continuing, then different choices should be made.  As a business ethics speaker, I understand Grassley’s frustration, but would hope that he would be more careful with his words.   Now is the time for level headed leadership, not sound bites spoken to garner media attention.

YOUR COMMENTS ARE WELCOME!


AIG Bonuses – Ethical or Insane? Business Ethics Speaker Chuck Gallagher Comments…

March 16, 2009

I want to make this clear – I am pro business!  I think that free enterprise is the life blood of our economic system and I fully support people making lots of aigmoney.  But, I have to question whether the payment of upwards of $165 million in bonuses to AIG employees is ethical or just insane?

QUESTION ONE:

The arguement in favor of AIG paying the bonuses is that the contracts that generated the bonuses were established before the economic meltdown and before AIG accepted government bailout money.  Employees who work(ed) for AIG therefore should be entitled to payment under the terms of their contract for services performed.

  • Do you agree?
  • Does the company have an ethical or moral obligation to pay regardless of circumstances?

QUESTION TWO:

AIG has accepted, according to published reports, upwards of $170 BILLION of government bailout money.  Sorry for the editoral content, but that is quite amazing by any standard that I could consider.  Nothing like that has happened in my lifetime and I’m over a half century in years.  So – here are some questions to consider:

  • Should AIG be forced to void pre-existing employment and bonus contracts if they accept government bailout money?
  • Should bonuses be paid?
  • What basis or grounds for payment or nonpayment make sense for AIG?

QUESTION THREE:

If a homebuilder constructs a home and finds that he/she cannot sell it for the asking price and, in fact, finds that the market for his product is below the construction loan – what happens?  Most of the time, the bank will foreclose and the sub-contractors, who have mechanic leins against the property, lose their time and receivable.  In other words, they lose because circumstances have changed.

  • Is AIG in the same circumstance?
  • Should the employment compensation contracts be treated similar to a mechanics lien – void through forclosure?
  • Is the government’s bailout of AIG in effect a forclosure to avoid bankrupcy?
  • Is there any reason that AIG should be treated differently than other small businesses that are unable to honor their commitments today?

FINAL THOUGHTS:

The definition of business ethics is, in business situations, the discipline dealing with what is good and bad and with a moral duty and obligation.  The question for AIG is – what is the ethical thing to do?  As a business ethics speaker, there is no right or wrong answer to most situations, it rather is a function of doing the right thing considering all the facts and circumstances.  My opinion – the moral duty and obligation in this situation is to void the employment bonus contracts and accept that were it not for the taxpayers, AIG would not be in business!

Now is the time for AIG and any organization that accpets bailout money to make the tough decisions that honor the trust that the federal government and taxpayers have given them.  Look to Lee Iacocca’s example – when the government bailed out Chrysler, he took $1 as his compensation.  Perhaps the folks at AIG should take note.  One thing is for sure they are not winning friends and influencing people – at least not positively.

YOUR COMMENTS WELCOME!