(CN) - M&T Bank knew it was in violation of federal securities and consumer disclosure laws, but covered up those transgressions to consummate its merger with Hudson City Bancorp, an angry shareholder claims in federal court.
In a complaint filed in Delaware on Wednesday, plaintiff David Jaroslawicz claims that when Hudson City shareholders agreed to merge with M&T Bank in April 2013, "M&T was grossly out of compliance with the Bank Secrecy Act and the Anti-Money Laundering regulations ... in connection with millions of customer accounts" and was also "out of compliance with consumer disclosure laws."
He says these legal compliance issues were not fully and fairly disclosed to shareholders prior to the merger note and only came to light after regulators cited the violations as factors in their delaying approval of the merger.
Jaroslawicz says M&T Bank ran afoul of regulators by failing to validate and verify over three million customer accounts, and also due to its practice of offering consumers free checking, only to later switch them to accounts that carried fees.
When Hudson City agreed to merge with M&T on Aug. 27, 2012, the banks opted to issue a joint proxy statement to shareholders to consider when voting for the merger by April 18, 2013.
This joint proxy failed to mention M&T was out of compliance with the BSA/AML and with the Consumer Financial Protection Bureau, or CFPB, Jaroslawicz says.
Just four days before the shareholder meeting was to be held, says Jaroslawicz, "M&T and Hudson City announced that regulators had expressed 'concerns' with M&T's procedures, systems and processes related to BSA/AML."
In response, the banks issued an "inadequate Proxy Supplement" that was "completely vague regarding these matters, omitted all particulars, and in any event provided proxy voters with insufficient time to evaluate the situation," the complaint says.
The defendants also held a public conference call three days prior to the Hudson City shareholder vote on the merger, states the complaint, which "was designed to ensure concerned shareholders that M&T had violated no laws (an assertion that has turned out to be incorrect) and that the matter was not a very serious one."
According to the complaint, M&T's Chief Financial Officer, Rene Jones, related in the call that the merger would only be postponed in the "near term" and said, "[w]e have no reason to believe that the issues involve any wrong doing or illegal conduct by anyone at M&T."
Those statements would prove to be untrue, and the information about M&T's conduct would be trickled out through public statements over the next three years when the merger date had to be extended several times, the complaint says.
Defendant CFO Jones also allegedly downplayed the work entailed for M&T to meet its regulatory requirements to effect the merger, "by asserting that the regulatory issues could be addressed 'quickly', and might involve hiring 100 people.
This proved to be a grossly inaccurate representation of the troubles M&T had with compliance, and the resources and time needed to fix them," the complaint says.
Jaroslawicz claims, "M&T and its officers and directors failed to detect that M&T failed to legally comply with BSA/AML requirements, and in particular, the Know Your Customer rules as to millions of its customer accounts."
The Know Your Customer rules, promulgated under the U.S. Patriot Act in 2003, "have been in place for over a decade, [and] are the cornerstone of a legally sufficient anti-money laundering program," the complaint says.
It was only at the April 22, 2015, annual M&T shareholder meeting that the company revealed that only one million out of 3.5 million customers had been verified and validated adequately under the 2003 Know your Customer regulations, Jaroslawicz says.
"That millions of accounts were so deficient would have been highly material to Hudson City shareholders who were entitled to vote in the April 18, 2013, election," claims the plaintiff, and that the "M&T warranty that all BSA/AML laws had been obeyed was false."
Federal regulators finally approved the merger on Sept. 30, 2015; it is set to close by Nov. 1, 2015.
Now that the merger has finally been approved by federal regulators, Jaroslawicz says, Hudson City shareholders are "stuck with acquiring shares in a bank with a spotty regulatory record, and which is now barred by regulators from any 'expansionary activities' until regulators are satisfied that all the ... legal issues are fixed." And this is a "blow to M&T, and its value, as M&T has traditionally grown through expansionary activities."
Jaroslawicz claims Hudson City shareholders have also suffered diminished dividend payouts in the three years since the merger was announced.
He seeks unspecified damages on behalf of the proposed class of shareholders on multiple claims of negligent violation of securities laws and breach of fiduciary duty.
Jaroslawicz is represented by Francis Murphy of Murphy & Landon in Wilmington, Delaware, and by Deborah Gross of the Law Offices of Bernard M. Gross P.C. in Philadelphia, Pennsylvania.
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