Was Bank of America Entrapped?
Peter J. Henning, a professor at Wayne State Law School, occasionally writes as a guest blogger for the Deal Professor. Mr. Henning specializes in issues related to white-collar crime and is a former editor of the White Collar Crime Law Prof Blog.
Bank of America’s chief executive, Kenneth D. Lewis. has been on the hot seat since mid-January when the bank reported large losses at Merrill Lynch that it apparently knew about prior to the merger of the companies. A slew of lawsuits have been filed accusing Mr. Lewis and Bank of America of committing securities fraud for not disclosing the losses before shareholders voted on the merger and then withholding the information until well after the merger closed.
Now, Attorney General Andrew M. Cuomo of New York has revealed that Mr. Lewis said the Treasury secretary at the time, Henry M. Paulson Jr., and the Federal Reserve chairman, Ben S. Bernanke, put pressure on him to complete the Merrill merger while keeping quiet about the losses until an additional government bailout. This raises serious questions whether the government caused the company to violate the federal securities laws.
The antifraud provisions of the Securities Exchange Act of 1934, Sections 10(b) and 14(a), prohibit misstatements or omissions of material facts in connection with the solicitation of proxies from shareholders and in public statements made by a company. A company has a duty to ensure that shareholders have truthful information, and if a prior disclosure is no longer correct or complete, then additional information must be disclosed to ensure the market is not operating on false data.
Whether or not Bank of America was entrapped is a matter for the courts. Whether or not Henry Paulson and Ben Bernanke told BofA not to disclose data that might have damaged an upcoming stockholder vote on a merger that the government very much wanted is quite another matter and far more serious.
Bernanke and Paulson are hardly innocents who may have made an error of omission. They are as versed on securities fraud as any Treasurer or Fed Chairman could be. If they willfully abetted a violation of the anti-fraud provisions of the Securities Exchange Act of 1934, in order to entice a merger, they are in very deep shit.
It will be interesting to see where this goes. A resignation by Bernanke perhaps, or possible indictment of the pair if the allegation proves out and Cuomo decides to run it down. Mario Cuomo has shown himself to be a very tough guy.