Remember the kids' book Alexander and the Terrible, Horrible, No Good, Very Bad Day? It's about a little boy who wakes up with gum in his hair and sees his day continue to spiral downhill as he's beset by one minor irritation after another. I was reminded of Alexander this weekend, reading about a series of litigation setbacks for Bank of America. None was calamitous, but together, they amounted to indisputable evidence that BofA, whatever its intentions, has a long way to go before putting its litigation problems to rest.
First came news of a new securities fraud suit against BofA. Fifteen institutional investors have elected to opt out of the bank's $624 million class action settlement of Countrywide-related claims, deciding they can do better in a joint suit outside of the class action. What's particularly interesting about the case, aside from Bernstein, Litowitz, Berger & Grossmann's 439-page (!) Los Angeles federal court complaint, is the lineup of plaintiffs. Three of them--BlackRock, TIAA-CREF, and Thrivent Financial--are also part of the group of 22 institutional investors that negotiated an $8.5 billion settlement of mortgage-backed securities contract claims with Bank of America in July.
Kathy Patrick of Gibbs & Bruns, who represented the MBS contract-claims investor group in talks with BofA, has said the bank tried to squeeze her clients to release securities fraud claims, but she refused to go along. Friday's filing confirms that some members of the Gibbs & Bruns group were serious about those fraud claims. The new suit also casts doubt on objectors' allegations of collusion between BofA and the Gibbs group, just in time for the first hearing on the $8.5 billion proposed settlement later this week. Blair Nicholas of Bernstein Litowitz, who represents the 15 fraud plaintiffs, told me that there's no link between the cases. Noting that he's previously represented most of the investors in the new filing, including TIAA-CREF, he said, "The two cases are completely independent and stand apart."
Last Friday afternoon, in more good news for Bernstein Litowitz and bad news for BofA, Manhattan federal judge Kevin Castel ruled that Bernstein and other class counsel can proceed with securities class action claims that Bank of America, then-CEO Kenneth Lewis, and then-CFO Joel Price deceived shareholders about Merrill Lynch's losses in the run-up to BofA's 2008 Merrill acquisition. Judge Castel's 25-page opinion concludes that Price and Lewis were well aware of mounting losses at Merrill, yet decided not to disclose the magnitude of those losses to shareholders in advance of their vote on the Merrill merger. The ruling revives fraud claims Judge Castel had previously dismissed; lawyers for the class were able to show in an amended complaint that BofA, Lewis, and Price had the requisite intent to defraud.
Students of BofA's Merrill merger-and there were quite a few of us at the time Manhattan federal judge Jed Rakoff was challenging BofA's Merrill-related settlement with the Securities and Exchange Commission-will definitely want to read Judge Castel's discussion of the disclosure advice offered by BofA's M&A counsel at Wachtell, Lipton, Rosen & Katz and by former BofA general counsel Timothy Mayopoulos. The judge suggests that Price didn't tell the lawyers everything he knew, and that Mayopoulos was fired when he urged additional disclosures.
Finally, late Friday a San Francisco state court judge ruled from the bench that the Federal Home Loan Bank of San Francisco's $19 billion state-law securities claims against BofA and several other defendants are not barred by the statute of limitations. David Grais of Grais & Ellsworth, who represents the bank, said the ruling is "very significant," given that the defendants devoted half of their motion to dismiss (known as a demurrer in California state court) to assertions that the FHLB waited too long to file its suit.
Friday's news wasn't all bad for BofA. In the Merrill class action, Judge Castel granted the bank's motion to dismiss claims that BofA didn't tell shareholders about receiving federal assistance to acquire Merrill. He also refused to expand the class to include claims by additional BofA securities owners. In the San Francisco FHLB case, Judge Richard Kramer found that Grais's clients' federal securities claims are time-barred; rather than trying to amend the complaint, Grais dropped the federal claims in favor of the state-law causes of action. (The defendants in the San Francisco FHLB case have additional dismissal arguments, which Judge Kramer said he'd hear in September; Grais said the judge has tentatively denied the arguments.)
A spokesman for Bank of America declined to comment on the Castel and Kramer rulings.
(Reporting by Alison Frankel)