MANHATTAN (CN) - The SEC has charged Bank of America with violating federal proxy rules by failing to disclose "extraordinary financial losses at Merrill Lynch & Co." before the shareholders vote that approved the merger of the two companies.
The SEC says BofA knew that Merrill lost $4.5 billion in October 2008 and billions more in November - between its merger announcement and the shareholders vote - but did not inform shareholders of it.
The SEC lawsuit seems timed for political effect, being filed on the eve of Bank of America CEO Brian Moynihan's appearance today (Wednesday) before Congress' Financial Crisis Inquiry Commission. Moynihan was called to testify along with the top executives at Goldman Sachs, JPMorgan Chase and Morgan Stanley.
In its complaint, the SEC says that after "Lehman Brothers' collapse and the calamitous repercussions in the financial markets," BofA and Merrill worked out the merger over the weekend of Sept. 13-14. They announced the merger on Sept. 15, and called for the shareholders vote on Dec. 5.
BofA and Merrill released a joint proxy statement on Nov. 3, to register the issuance of BofA shares to be exchanged for Merrill shares in the merger, and filed an S-4 registration statement.
"Under the rules governing the use of Form S-4, Bank of America was required to disclose material changes to Merrill's affairs that were not reflected in Merrill's quarterly reports or certain other filings. Bank of America did not describe any such material changes in Merrill's affairs in either the proxy or registration statement," the SEC says.
The complaint continues: "The proxy statement described to shareholders Merrill's financial condition, including its balance sheet and capital position, as of the end of September 2008. By the time of the December 5 shareholder meeting, however, Bank of America had become aware of $4.5 billion in net losses that Merrill had sustained in October and estimated that Merrill had experienced billions of additional losses in November - a disastrous performance that represented a fundamental change to the information previously provided to shareholders. Combined, the October results and November estimates constituted approximately one third of the value of the merger at the time of the shareholder vote and more than 60 percent of the aggregate losses that Merrill experienced in the preceding three quarters of the year.
"Despite its representation that it would update shareholders about fundamental changes to the information previously disclosed, Bank of America kept shareholder in the dark as they were called upon to vote on the proposed merger at the end of a quarter of nearly unprecedented volatility and uncertainty."
The SEC says Bank of America violated Section 14(a) of the Securities Exchange Act. It wants the bank enjoined from doing it again, and an unspecified fine.
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