Source: https://www.scribd.com/document/41111452/10-02-04-SEC-v-BAC-1-09-cv-6829-at-the-US-District-Court-Southern-District-of-New-York-Dkt-77-SEC-s-Motion-for-Entry-of-Final-Consent-Judgment
Timestamp: 2019-12-07 04:36:28
Document Index: 399518245

Matched Legal Cases: ['§\n240', '§ 229', '§78', '§ 229', '§ 78', '§ 1961', '§ 1914', '§ 78', '§78', '§ 202', '§ 202']

10-02-04 SEC v BAC (1:09-cv -6829) at the US District Court, Southern District of New York - Dkt #77 SEC's Motion for Entry of Final Consent Judgment | Complaint | Bank Of America
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Case 1:09-cv-06829-JSR Document 77 Filed 02/04/2010 Page 1 of 1
Plaintiff, : 09 Civ. 6829 (JSR)
: 10 Civ. 0215 (JSR)
-against- : ECF Cases
BANK OF AMERICA CORPORATION, :
PLEASE TAKE NOTICE, that plaintiff, the Securities and Exchange Commission
(the “Commission”), respectfully moves at such time as scheduled by the Court for the entry
of the proposed Final Consent Judgment attached hereto as Exhibit A. In support of this
motion, the Commission submits: (a) the Memorandum of Plaintiff Securities and Exchange
Commission in Support of Entry of the Proposed Consent Judgment; and (b) the Appendix of
Exhibits to the Statement of Facts.
/s/ Scott L. Black .
Scott L. Black
(212) 336-0029
blacks@sec.gov
vasilescu@sec.gov
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 1 of 53
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 2 of 53
Plaintiff, 09 Civ. 6829 (JSR)
-against- . ECF Cases
FINAL CONSENT JUDGMENT AS TO DEFENDANT
WHEREAS the Securities and Exchange Commission ("Commission") filed an Amended
Complaint on October 19. 2009 in the civil action 09 Civ. 6829 (JSR) alleging that defendant
Bank of America Corporation ("BAC") violated Section 14 of the Securities Exchange Act of
1934 ("Exchange Act"), and Rules 14a-3 and 1l4a-9 promulgated thereunder, as a result of its
failure adequately to disclose, in connection with the proxy solicitation for the acquisition of
Merrill Lynch & Co., Inc. ("Merrill"), information concerning Merri'll's payment of year-end
bonuses (the "Bonus Case");
WHEREAS the Commission subsequently filed a Complaint on January 12, 20 10 in the
civil action 10 Civ. 0215 (JSR) alleging that BAC violated Section 14 of the Exchange Act and
Rule 1l4a-9 thereunder as a result of its failure adequately to disclose, in connection with the
proxy solicitation for the acquisition of Merrill, information concerning Merrill's losses in the
fourth quarter of 2008 (the "Q4 Loss Case") (together with the Bonus Case, the "Actions");
WHEREAS BAC has executed the Consent annexed hereto and incorporated herein for
the purpose of settling the Actions before the Court; and
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 3 of 53
WHEMREAS BAG has entered a general appearance in the Actions, consented to the
Court's jurisdiction over it and the subject matter of the Actions, consented to the entry of this
Final Consent Judgment as to Defendant Bank of America Corporation ("Final Judgment"), and
waived any right to appeal from this Final Judgment in the Actions:
IT IS HEREBY ORDERED, ADJUDGED, AND) DECREED that defendant BAG
shall, for the years ending December 31, 2010, 201 1 and 2012, engage an independent individual
or entity ("Independent Auditor") to assess BAG's disclosure controls and procedures (as defined
in Rule 13a- 15(e) of the Securities Exchange Act of 1934 ("Exchange Act") [1 7 C.F.R. §
240.1 3a-l 5(e)]) and to issue an attestation report, in a form acceptable to the Cormmission, based
on its examination to obtain reasonable assurance on whether BAC's conclusion regarding the
effectiveness of such disclosure controls and procedures is fairly stated, in all material respects,
based on criteria established in Internal Contfrol-Integrated Frameworkissued by the
Committee of Sponsoring Organizationsof the Treadway Commission (COSO). In performing
its examination in accordance with applicable attestation standards, the Independent Auditor will
consider elements of Auditing Standard No. 5 issued by the Public Company Accounting
Oversight Board (governing attestations under Section 404 of the Sarbanes-Oxley Act of 2002)
that the Independent Auditor deems relevant to its examination and in evaluating BAG's
conclusion based on CO SO. The Independent Auditor shall, among other things: (i) inspect
documentation of BAG's disclosure controls and procedures in testing whether they are designed
effectively; (ii) test whether such disclosure controls and procedures have been implemented;
(iii) test whether such disclosure controls and procedures are operating effectively; (iv) in testing
the design and operating effectiveness of BAG's disclosure controls and procedures based on
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 4 of 53
COSO, consider control environment elements, including, among others, the knowledge and
skills of the employees and officers who are part of the disclosure controls, such as the members
of BAC's Disclosure Committee, necessary to perform the roles in the disclosure controls and
procedures that they have been assigned; and (v) based on the results of the Independent
Auditor's procedures issue an attestation report expressing an opinion on BAC's assertion as to
whether its disclosure controls and procedures as of the applicable year-end date are effective in
recording, processing, summarizing, and reporting within the Company, on a timely basis,
information required to be disclosed by the Company in the reports that it files or submits under
the Exchange Act, and that information is accumulated and communicated to the Company's
management, including the Company's Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. BAC shall provide the
Independent Auditor's attestation report in its annual report to shareholders and in its reports on
Form I10-K. BAC shall use its best efforts to retain the public accounting firm that audits the
financial statements included in BAC's periodic reports to serve as the Independent Auditor. If,
despite its best efforts, BAC is unable to retain the public accounting firmi that audits its financial
statements to serve as the Independent Auditor, BAC shall select an Independent Auditor in
consultation with the Commission's staff.
IT IS HEREBY FURTHER ORDERED, ADJUDGED, AND DECREED that
defendant BAC shall, for a period of three (3) years after entry of this Final Judgment, with
respect to each proxy statement filed pursuant to Section 14(a) of the Exchange Act, include
certifications substantially in the form specified in Item 601 (b)(3 1)(i) of Regulation S-K [17
C.F.R. § 229.60 1(b)(3 1)(i)], and file or otherwise include such certifications as an appendix to
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 5 of 53
such proxy statement. BAC shall require that its principal executive officer and principal
financial officer, or persons performing similar functions at the time of the filing of the proxy
statement, each sign such certification.
IT IS HEREBY FURTHER ORDERED, ADJUDGED, AND DECREED that within
forty-five (45) days of the entry of this Final Judgment, the Audit Committee of BAC's Board of
Directors ("Audit Conmmittee") shall retain disclosure counsel with expertise in disclosure issues
("Disclosure Counsel") for a period of three (3) years after entry of this Final Judgment. The
Disclosure Counsel shall report solely to the Audit Committee. BAC shall require that the
Disclosure Counsel: (i) review drafts of all of BAC's public disclosure statements, including all
quarterly reports, annual reports, proxy statements, and current reports containing financial
information; and (ii) confer, in executive session, with members of the Audit Committee at all
regularly scheduled meetings of the Audit Committee, separate and apart from the non-
independent members of BAG's Board of Directors, to discuss the adequacy of BAC's
disclosures in its public disclosure statements. BAC shall also require that the Disclosure
Counsel, for the period of engagement, not enter into, directly or indirectly, any other
employment, consulting, or other professional relationship with BAG or its affiliates, directors,
officers, employees, or agents without obtaining the consent of the Commission's staff.
defendant BAG shall adopt an independence requirement for members of the Compensation
Committee of BAG's Board of Directors ("Compensation Committee") according to the
independence standards set forth in Section 10A(m)(3)(B) of the Exchange Act [15 U.S.C. §78j-
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 6 of 53
1(m)(3)(B)]. Such independence standards shall require BAC to include as members of the
Compensation Committee only those members who will not, directly or indirectly, accept any
consulting, advisory or other compensatory fee from BAC or any affiliate or subsidiary of BAG,
irrespective of the size or materiality of such fee, other than compensation in the member's
capacity as a member of BAG's Board of Directors or be an affiliated person of BAG or any of
BAC's subsidiaries. BAG shall maintain such a requirement for a period of three (3) years
following entry of this Final Judgment.
defendant BAG shall continue to retain, for a period of three (3) years after entry of this Final
Judgment, a compensation consultant ("Compensation Consultant"). BAG shall require that the
Compensation Consultant be engaged by, and report solely to, the Compensation Committee and
that during the three (3) year period of engagement, the Compensation Consultant not enter into,
directly or indirectly, any other employment, consulting, or other professional relationship with
BAG or its affiliates, directors, officers, employees, or agents.
defendant BAG shall, within thirty (30) days of the entry of this Final Judgment, institute and
implement formal, written incentive compensation principles and processes and post such
principles and processes 'in a prominent location on BAG's website at www.bankofamerica-com.
For a period of three (3) years after entry of this Final Judgment, BAG shall maintain and comply
with such written principles and processes as posted on BAG's website unless and until BAG
informs its shareholders of any proposal to change such principles and processes, and provides
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 7 of 53
for a separate advisory shareholder vote regarding such proposed changes. Any such shareholder
vote shall not be binding on the BAC Board of Directors and shall not be construed as overruling
a decision by such Board, nor will it create or imply any additional fiduciary duty by such Board
or be construed to restrict or limit the ability of shareholders to make proposals for inclusion in
proxy materials related to executive compensation.
IT IS HEREBY FURTHER ORDERED, ADJUDGED, AND DECREED that, if
during the three (3) years following the date of the entry of this Final Judgment BAG conducts
an annual meeting of security holders (or a special meeting in lieu of an annual meeting) for
which proxies will be solicited for the election of directors, BAG shall provide a separate
advisory shareholder vote ("Vote") regarding the compensation of executives, as disclosed
pursuant to Item 402 of Regulation S-K [17 C.F.R. § 229.402)j, including the compensation
discussion and analysis, the compensation tables, and any related materials. Any such Vote shall
not be binding on the BAG Board of Directors and shall not be construed as overruling a
decision by such Board, nor will it create or imply any additional fiduciary duty by such Board
IT IS HEREBY FURTHER ORDERED, ADJUDGED, AND DECREED that, in the
event that, after entry of this Final Judgment, the Commission or other regulatory agency or
regulator (or legislation) provides for a new regulation or requirement that is applicable to BAG
with respect to the same subject matter as is addressed by one or more of the remedial
components of this Final Judgment, BAG shall consult with the Conmmission's staff concerning
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 8 of 53
the interaction of such new regulation or requirement and the remedial component provided for
in this Final Judgment, and BAG may propose to amend or modify any term of this Final
Judgment, with the Court's approval. The sole purpose for any such amendment or modification
shall be to avoid a circumstance in which BAG may be subject to conflicting, overlapping or
duplicative regulations or requirements in whole or in part, or remain subject to a term of this
Final Judgment when the purpose thereof has been superseded or fulfilled by such a new
regulation or requirement.
defendant BAG is liable for disgorgement of $1 and a civil penalty in the amount of
$150,000,000 pursuant to Section 21 (d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)J. BAG
shall satisfy this obligation by paying $150,000,001 within fourteen (14) days after entry of this
Final Judgment to the Clerk of this Court, together with a cover letter identifying BAG as a
defendant in the Actions; setting forth the titles and civil action numbers of the Actions and the
name of this Court; and specifying that payment is made pursuant to this Final Judgment. BAG
shall simultaneously transmit photocopies of such payment and letter to the Commission's
counsel in this action. By making this payment, BAG relinquishes all legal and equitable right,
title, and interest in such funds, and no part of the funds shall be returned to BAG. BAG shall
pay post-judgment interest on any delinquent amounts pursuant to 28 U.S.C. § 1961.
The Clerk shall deposit the funds into an interest bearing account with the Court Registry
Investment System ("CRIS") or any other type of interest bearing account that is utilized by the
Court. These funds, together with any interest and income earned thereon (collectively, the
"Fund"), shall be held in the interest bearing account until further order of the Court. In
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 9 of 53
accordance with 28 U.S.C. § 1914 and the guidelines set by the Director of the Administrative
Office of the United States Courts, the Clerk is directed, without further order of this Court, to
deduct from the income earned on the money in the Fund a fee not to exceed ten percent of the
income earned on the Fund. Such fee shall not exceed that authorized by the Judicial Conference
The Fund shall be distributed at a later date pursuant to the Fair Fund provisions of
Section 308(a) of the Sarbanes-Oxley Act of 2002 and in accordance with further order of the
Court. The Commission may by motion propose a plan to distribute the Fund subject to the
Court's approval. Regardless of whether any such Fair Fund distribution is made, amounts
ordered to be paid as civil penalties pursuant to this Judgment shall be treated as penalties paid to
the government for all purposes, including all tax purposes, To preserve the deterrent effect of
the civil penalty, BAC shall not, after offset or reduction of any award of compensatory damages
in any Related Investor Action based on BAC's payment of disgorgement in the Actions, argue
that it is entitled to, nor shall it further benefit by, offset or reduction of such compensatory
damages award by the amount of any part of BAC's payment of a civil penalty in the Actions
("Penalty Offset"). If the court in any Related Investor Action grants such a Penalty Offset,
BAC shall, within 30)days after entry of a final order granting the Penalty Offset, notify the
Commission's counsel in this action and pay the amount of the Penalty Offset to the United
States Treasury or to a Fair Fund, as the Commission directs. Such a payment shall not be
deemed an additional civil penalty and shall not be deemed to change the amount of the civil
penalty imposed in this Judgment. For purposes of this paragraph, a "Related Investor Action"
means a private damages action brought against BAC by or on behalf of one or more investors
based on substantially the same facts as alleged in the complaints in the Actions.
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 10 of 53
IT IS HEREBY FURTHER ORDERED, ADJUDGED, AND DECREED that the
provisions of the annexed Consent of Defendant Bank of America Corporation be, and the same
hereby are, incorporated in this Final Judgment with the same force and effect as if fully set forth
herein, and that defendant BAG shall comply with all of the undertakings and agreements set
IT IS HEREBY FURTHER ORDERED, ADJUDGED, AND DECREED that this
Court shall retain jurisdiction of this matter for the purposes of enforcing the terms of this Final
There being no just reason for delay, pursuant to Rule 54(b) of the Federal Rules of Civil
Procedure, the Clerk is ordered to enter this Final Judgment forthwith and without further notice.
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 11 of 53
CONSENT OF DEFENDANT BANK OF AMERICA CORPORATION
1. Defendant Bank of America Corporation ("BAC") acknowledges having been
served with the Amended Complaint in the civil action 09 Civ. 6829 (JSR) and the Complaint in
the civil action 10 Civ. 0215 (JSR) (collectively, the "Actions"), enters a general appearance in
the Actions, and admits the Court's jurisdiction over it and over the subject matter of the
2. Defendant BAC hereby consents to the entry of the annexed Final Consent
Judgment As To Defendant Bank of America Corporation ("Final Judgment") in the Actions, in
the form annexed hereto and incorporated by reference herein (prior to any adjudication of any
issue of law or fact), which, among other things:
(a) orders BAC to pay disgorgement in the amount of $ 1;
(b) orders BAC to pay a civil penalty in the amount of $150,000,000 pursuant
to Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)I;l and
(c) orders Defendant to perform the actions and comply with the measures
specified in the Final Judgment, including but not limited to, retaining an
independent auditor to perform an assessment and provide an attestation
report on the effectiveness of BAC's disclosure controls and procedures.
furnishing management certifications for proxy statements, retaining
disclosure counsel to the Audit Committee of BAC's Board of Directors,
adopting an independence requirement for all members of the
Compensation Committee of BAC's Board of Directors ("Compensation
Committee") according to the independence standards set forth in Section
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 12 of 53
IOA(m)(3)(B) of the Exchange Act [15 U.S.C. §78j.-l(m)(3)(B)], retaining
an independent compensation consultant to the Compensation Committee,
providing BAC shareholders with an annual "say on pay" advisory vote,
and establishing, disclosing, and maintaining written incentive
compensation principles.
3. Defendant BAC acknowledges that the civil penalty paid pursuant to the Final
Judgment may be distributed pursuant to the Fair Fund provisions of Section 308(a) of the
Sarbanes-Oxley Act of 2002. Regardless of whether any such Fair Fund distribution is made, the
civil penalty shall be treated as a penalty paid to the government for all purposes, including all
tax purposes. To preserve the deterrent effect of the civil penalty, BAG agrees that it shall not,
after offset or reduction of any award of compensatory damages in any Related Investor Action
based on BAC's payment of disgorgement in the Actions, argue that it is entitled to, nor shall it
further benefit by, offset or reduction of such compensatory damages award by the amount of
any part of BAC's payment of a civil penalty in the Actions ("Penalty Offset"). If the court in
any Related Investor Action grants such a Penalty Offset, BAC agrees that it shall, within 30
days after entry of a final order granting the Penalty Offset, notify the Commission's counsel in
this action and pay the amount of the Penalty Offset to the United States Treasury or to a Fair
Fund, as the Commission directs. Such a payment shall not be deemed an additional civil
penalty and shall not be deemed to change the amount of the civil penalty imposed in this action.
For purposes of this paragraph, a "Related Investor Action" means a private damages action
brought against BAC by or on behalf of one or more investors based on substantially the same
facts as alleged in the complaints in this Actions.
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 13 of 53
4. Defendant BAG agrees that it shall not seek or accept, directly or indirectly,
reimbursement or indemnification from any source, including but not limited to payment made
pursuant to any insurance policy, with regard to any civil penalty amounts that BAG pays
pursuant to the Final Judgment, regardless of whether such penalty amounts or any part thereof
are added to a distribution fund or otherwise used for the benefit of investors. BAC further
agrees that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any
federal, state, or local tax for any penalty amounts that B3AC pays pursuant to the Final
Judgment, regardless of whether such penalty amounts or any part thereof are added to a
distribution fund or otherwise used for the benefit of investors.
5. Defendant BAG waives the entry of findings of fact and conclusions of law
pursuant to Rule 52 of the Federal Rules of Civil Procedure.
6. Defendant BAG waives the right, if any, to a jury trial and to appeal from the
entry of the Final Judgment.
7. Defendant BAG enters into this Gonsent voluntarily and represents that no threats,
offers, promises, or inducements of any kind have been made by the Commission or any
member, officer, employee, agent, or representative of the Commission to induce BAG to enter
into this Consent.
8. Defendant BAG agrees that this Consent shall be incorporated into the Final
Judgment with the same force and effect as if fully set forth therein.
9. Defendant BAG will not oppose the enforcement of the Final Judgment on the
ground, if any exists, that it fails to comply with Rule 65(d) of the Federal Rules of Civil
Procedure, and hereby waives any objection based thereon.
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 14 of 53
10. Defendant BAC waives service of the Final Judgment and agrees that entry of the
Final Judgment by the Court and filing with the Clerk of the Court will constitute notice to BAG
of its terms and conditions. BAG further agrees to provide counsel for the Commission, within
thirty days after the Final Judgment is filed with the Clerk of the Court, with an affidavit or
declaration stating that BAG has received and read a copy of the Final Judgment.
11. Defendant BAG acknowledges that any violation of any of the terms of the Final
Judgment may place it in contempt of this Court and subject it to civil or criminal sanctions,
12. Defendant BAG acknowledges that it has been informed and understands that the
Commission, at its sole and exclusive discretion, may refer, or grant access to, this matter or any
information or evidence gathered in connection therewith or derived therefrom, to any person or
entity having appropriate administrative, civil, or criminal jurisdiction. if the Comm-ission has
13. Consistent with 17 C.F.R. § 202.5(f), this Consent resolves only the claims
asserted against defendant BAC in the Actions. BAC acknowledges that no promise or
representation has been made by the Commission or any member, officer, employee, agent, or
representative of the Commission with regard to any criminal liability that may have arisen or
may arise from the facts underlying this action or immunity from any such criminal liability.
BAG waives any claim of Double Jeopardy based upon the settlement of this proceeding,
including the imposition of any remedy or civil penalty herein. BAG further acknowledges that
the Court's entry of a final consent judgment and order may have collateral consequences under
federal or state law and the rules and regulations of self-regulatory organizations, licensing
boards, and other regulatory organizations. Such collateral consequences include, but are not
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 15 of 53
limited to, a statutory disqualification with respect to membership or participation in, or
association with a member of, a self-regulatory organization. This statutory disqualification has
consequences that are separate from any sanction imposed in an administrative proceeding.
14. Defendant BAC acknowledges that there is an evidentiary basis for the statements
in the Statement of Facts, prepared by the SEC based on discovery in the action 09 Civ. 6829,
that is attached as Exhibit A to this Consent. BAC further agrees that it understands and will
comply with the Commission's policy "not to permit a defendant or respondent to consent to a
judgment or order that imposes a sanction while denying the allegation in the complaint or order
for proceedings." 17 C.F.R. § 202.5. Consistent with this policy, BAC agrees not to take any
action or to make or permit to be made any public statement denying, directly or indirectly, the
statements in the Statement of Facts or any allegation in the complaints filed in the Actions or
creating the impression that the statements in the Statement of Facts or the allegations in the
complaints are without factual basis. If BAC breaches this agreement, the Commission may
petition the Court to vacate the Final Judgment and restore the Actions to its active docket.
Nothing in this paragraph affects BAC's: (i) testimonial obligations;, or (ii) right to take legal or
factual positions in litigation or other legal inquiries, investigations or proceedings in which the
Commission is not a party. BAC's acknowledgement in this paragraph that there is an
evidentiary basis for the statements in the Statement of Facts is not an admission as to the truth
of any such statements or any inferences or legal conclusions based on such statements. BAC's
acknowledgement does not bind BAC to such statements or any inferences or legal conclusions
based on such statements in any other litigation or proceeding.
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 16 of 53
15. Defendant BAG hereby waives any rights under the Equal Access to Justice Act,
the Small Business Regulatory Enforcement Fairness Act of 1996, or any other provision of law
to seek from the United States, or any agency, or any official of the United States acting in his or
her official capacity, directly or indirectly, reimbursement of attorney's fees or other fees,
expenses, or costs expended by BAG to defend against this action. For these purposes, BAG
agrees that it is not the prevailing party in this action since the parties have reached a good faith
16. Defendant BAG agrees that the Commission may present the Final Judgment to
the Court for signature and entry without further notice.
17. Defendant BAG agrees that this Gourt shall retain jurisdiction over this matter for
the purpose of enforcing the terms of the Final Judgment.
Dated: ~ 010
On ________20 10, ______________,a person known to me,
personally appeared before me and acknowledged executing the foregoing Consent with full
authority to do so on behalf of Bank of America Corporation as its ______
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 17 of 53
-Approved as to form:.
Lewis J. Lirn
Tel: (212) 225-2000
By : _ _ _ _ _ _ _ _ _ _ _ _
New York, New York 100 19-6064
Attorneys for Defendant Bank of America
Dated: _______21
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 18 of 53
State of CaliforniaI
County of 5.09A' ?VC SC
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Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 19 of 53
I. The Bank of America-Merrill Merger
1. On Friday, September 12, 2008, in the wake of Lehman Brothers’ rumored
bankruptcy and the shockwaves that were sent throughout the financial markets, the senior
management of Merrill Lynch & Co., Inc. (“Merrill”) began exploring the possibility of being
acquired, in whole or in part, by a commercial bank. (Transcript of deposition of Gregory J.
Fleming (Oct. 22, 2009) (“Fleming Tr.”) at 74-75, 102-103, 108-114; Transcript of deposition of
John A. Thain (Nov. 4, 2009) (“Thain Tr.”) at 58, 65-66.) Among the candidates considered by
Merrill’s management was Bank of America, which Merrill’s former Chief Executive Officer,
Stanley O’Neal, had previously approached about the possibility of a combination between the
two companies. (Fleming Tr. at 112; Thain Tr. at 65-66; Transcript of deposition of Kenneth
Lewis (Oct. 30, 2009) (“Lewis Tr.”) at 28-30.)
2. The following day, Saturday, September 13, John Thain, Merrill’s then-Chairman
and Chief Executive Officer, called Kenneth Lewis, then-Chairman, President, and Chief
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 20 of 53
Executive Officer of Bank of America, to discuss the possibility of a strategic combination
between the two companies in light of the extremely distressed conditions in the financial
services industry. (Lewis Tr. at 39; Thain Tr. at 67; Defendant Bank of America Corporation’s
Responses and Objections to Plaintiff Securities and Exchange Commission’s Requests for
Admission (Jan. 4, 2010) (“BOA’s RFA Response”) No. 2.) On the afternoon of that day, Thain
and Lewis met in person at Bank of America’s corporate apartment in New York City to discuss
the outlines of a possible transaction. (Lewis Tr. at 41-43; Thain Tr. at 68-70.) Thain proposed
that Bank of America purchase an approximately 9.9 percent stake in Merrill; in response, Lewis
expressed an interest in acquiring Merrill in its entirety, a transaction that Lewis deemed
strategically important to Bank of America for several reasons, including that it would
significantly enhance the Bank’s investment banking and investment management capabilities
and global reach. (Thain Tr. at 68-69; Lewis Tr. at 43-47; BOA’s RFA Response No. 3.) At the
conclusion of their meeting, Lewis and Thain agreed that teams from Bank of America and
Merrill would meet in order to begin the due diligence process. (Lewis Tr. at 49; Thain Tr. at
69-70.)
3. Representatives from Bank of America and Merrill began conducting due
diligence on Saturday, September 13, and continued the process throughout the night and into the
next day. (Lewis Tr. at 49, 54, 61, 71; Transcript of deposition of Gregory L. Curl (Dec. 11,
2009) (“Curl Tr.”) at 65, 74; Fleming Tr. at 72.) On the morning of Sunday, September 14,
Lewis and Thain met again to discuss the results of due diligence and the strategic rationale for a
merger between the two companies. (Plaintiff’s Exhibit (“P-Exh.”) 46 (Bank of America Corp.,
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 21 of 53
Proxy Statement (Schedule 14A) (Nov. 3, 2008) (“Proxy Statement”), at 50).) At the conclusion
of their meeting, Lewis and Thain agreed that representatives of Bank of America and Merrill
would pursue the negotiation of the terms of a merger transaction. (Id.) Lewis assigned Greg
Curl, Bank of America’s Vice Chairman of Corporate Development, the responsibility of leading
the negotiations on behalf of Bank of America. (Lewis Tr. at 48, 51; Curl Tr. at 66-67; Fleming
Tr. at 119-121.) Thain assigned Greg Fleming, Merrill’s then-President, the responsibility of
leading the negotiations on behalf of Merrill. (Thain Tr. at 69-70; Fleming Tr. at 119-121; Curl
Tr. at 71.) Bank of America retained financial advisers to assist in the due diligence of Merrill
Lynch. (Proxy Statement at 49.)
4. Given the uncertain impact of Lehman Brothers’ rumored bankruptcy, senior
executives of both Merrill and Bank of America considered it important that the two companies
negotiate and agree on a transaction before the opening of the stock market on Monday,
September 15, 2008. (Fleming Tr. at 111-112; Thain Tr. at 66; Lewis Tr. at 94-95; BOA’s RFA
Response No. 7.) In the week leading to the merger negotiations with Bank of America,
Merrill’s share price had declined by approximately 36 percent. (Proxy Statement at 49.) In
addition, according to Fleming, certain members of Merrill’s management had concerns about a
possible downgrade of the company’s ratings after having been advised by Moody’s Investors
Service that, in view of Lehman Brothers’ collapse and the volatility in the financial markets, the
rating agency had doubts about the business model of independent investment banks. (Fleming
Tr. at 78-79; P-Exh. 3 (e-mail from Greg Fleming to John Thain (Sept. 11, 2008), at BAC-ML-
NYAG 10176510).) Merrill’s management was also informed, after negotiations with Bank of
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 22 of 53
America had begun, that another rating agency, Standard & Poor’s, was considering placing
Merrill’s ratings on credit watch. (P-Exh. 4 (e-mail from Eric Heaton (Sept. 14, 2008), at BAC-
ML-NYAG 10176776).) In addition, on Friday, September 12, Merrill was asked by J.P.
Morgan and Citibank to pledge billions of dollars in additional collateral to cover intraday
exposure, similar to rumored requests that had been made to Lehman Brothers by counterparty
banks. (Fleming Tr. at 90; Thain Tr. at 117; P-Exh. 5 (e-mail from John Thurlow (Sept. 13,
2008), at BAC-ML-NYAG 10177086).) According to Lewis, Bank of America was concerned
that if the deal was not announced before Lehman declared bankruptcy, another suitor could
acquire Merrill or that there would be a significant loss in Merrill’s franchise value due to
increased liquidity pressure. (Lewis Tr. at 94-95.)
5. The negotiations of the business terms of the merger transaction took place on
Sunday, September 14, 2008, at the offices of Wachtell, Lipton, Rosen & Katz (“Wachtell
Lipton”), the law firm Bank of America retained for purposes of the merger transaction.
(Fleming Tr. at 126-131; Curl Tr. at 73-75.) On Sunday evening, after the agreement on the
principal business terms had been reached, the proposed merger transaction was presented to the
Boards of Directors of Bank of America and Merrill.1 (Fleming Tr. at 193-194; Lewis Tr. at 73-
Each Board of Directors met separately to consider the merger. For Bank of America,
the directors present at the Board meeting were William Barnet, Frank Bramble, John Collins,
Gary Countryman, Tommy Franks, Charles Gifford, Ken Lewis, Walter Massey, Thomas May,
Thomas Ryan, O. Temple Sloan, Robert Tillman, Monica Lozano, Patricia Mitchell, Meredith
Spangler, and Jackie Ward. (P-Exh. 35 (Minutes of Special Meeting of Board of Directors of
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74; P. Exhs. 10 (Merrill Lynch & Co., Inc., Minutes of Special Meeting of Board of Directors
(Sept. 14, 2008), at BAC-ML-NYAG-502-00001718-1728), 35 (Minutes of Special Meeting of
Board of Directors of Bank of America Corp. (Sept. 14, 2008), at BAC-ML-NYAG 00003747-
3761).) The respective Boards unanimously approved the merger. (Id.)
6. Lewis and Thain each signed the merger agreement on behalf of their respective
companies in the early hours of September 15, 2008, and the merger was publicly announced
before the opening of the stock market on that day. (Thain Tr. at 108; Lewis Tr. at 93; Proxy
Statement, Appendix A (Agreement and Plan of Merger by and between Merrill Lynch & Co.,
Inc. and Bank of America Corp., dated as of Sept. 15, 2008 (“Merger Agreement”)); Bank of
America Corp., Press Release, Bank of America Buys Merrill Lynch Creating Unique Financial
Services Firm (Sept. 15, 2008).) Under the Merger Agreement, Bank of America agreed to
provide Merrill shareholders with 0.8595 shares of Bank of America common stock for each
share of Merrill common stock. (Merger Agreement, Section 1.4.) At the time the Merger
Agreement was signed, this exchange ratio represented a $29 share price for each Merrill share --
a 70% premium to Merrill’s stock price on the prior trading day, September 12, 2008 -- and a
Bank of America Corp. (Sept. 14, 2008), at BAC-ML-NYAG 00003747).) For Merrill, the
directors present at the Board meeting were John Thain, Carol Christ, Virgis Colbert, Armando
Codina, John Finnegan, Judith Mayhew Jonas, Aulana Peters, Joseph Prueher, Ann Reese, and
Charles Rossotti. (P-Exh. 10 (Merrill Lynch & Co., Inc., Minutes of Special Meeting of Board
of Directors (Sept. 14, 2008), at BAC-ML-NYAG-502-00001718).)
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total deal value of approximately $50 billion. (Proxy Statement at 50; Fleming Tr. at 141; Curl
Tr. at 225.)
II. Bank of America’s Merger-Related Public Filings
7. To solicit shareholder votes for approval of the merger, on November 3, 2008
Bank of America and Merrill each filed with the Securities and Exchange Commission (“SEC”
or “Commission”), and sent to their respective shareholders, a proxy statement scheduling the
respective shareholder meetings to vote on the merger for December 5, 2008. (Proxy Statement,
Notice of Special Meeting of Stockholders; Merrill Lynch & Co., Inc. Proxy Statement
(Schedule 14A) (Nov. 3, 2008), Notice of Special Meeting of Stockholders.) Lewis and Thain
each signed a cover letter accompanying the proxy statements, stating, among other things, that
the Boards of Directors of both companies unanimously recommended that shareholders vote in
favor of the merger. (Proxy Statement, Letter to Stockholders.)
8. In October 2008, in order to register the shares of stock to be exchanged in the
merger, Bank of America also filed with the Commission a registration statement on Form S-4
and two amendments on Form S-4/A. (P-Exhs. 39 (Bank of America Corp., Registration
Statement (Form S-4) (Oct. 2, 2008)), 44 (Bank of America Corp., Amendment No. 1 to
Registration Statement (Form S-4/A) (Oct. 22, 2008)), 45 (Bank of America Corp. Amendment
No. 2 to Registration Statement (Form S-4/A) (Oct. 29, 2008)) (collectively, “Registration
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Statement”).)2 The Registration Statement, which incorporated the proxy statements prepared by
Bank of America and Merrill as part of the prospectus, became effective on October 30, 2008.3
9. Bank of America also included in the Registration Statement an express
undertaking to “reflect in the prospectus any facts or events arising after the effective date of the
registration statement . . . which, individually or in the aggregate, represent a fundamental
change in the information set forth in the registration statement.” (Registration Statement, at II-
4.) In a section of the Proxy Statement entitled “WHERE YOU CAN FIND MORE
INFORMATION,” Bank of America referred shareholders to the Registration Statement for
additional relevant information about Bank of America and its stock. (Proxy Statement at 123.)
10. The Proxy Statement and Registration Statement, and the documents incorporated
by reference into those filings, provided information about, among other matters, the terms of the
proposed merger transaction that had been agreed to in September, as well as the financial
The Registration Statement was signed by Lewis, Joe Price, then-Bank of America’s
Chief Financial Officer, Neil Cotty, then-Bank of America’s Chief Accounting Officer, as well
as all of the members of the Board of Directors of Bank of America. (Registration Statement at
II-6 – II-7.)
By letter dated October 30, 2008, Bank of America requested that the SEC’s Division
of Corporation Finance accelerate the effectiveness of the Registration Statement to October 30,
2008, and acknowledged, among other matters, that “[t]he action of the Commission or staff . . .
in declaring the filing effective, does not relieve [Bank of America] from its full responsibility
for the adequacy and accuracy of the disclosure in the filing.” (P-Exh. 117 (letter from Teresa
M. Brenner to Division of Corporation Finance, Securities and Exchange Commission (Oct. 30,
2008)).) The Commission declared the Registration Statement effective at 5:00 p.m. on October
30, 2008. In addition to the disclosures made in the Registration Statement, Bank of America
was responsible at all times for the accuracy and adequacy of the disclosures made in the Proxy
Statement. (BOA’s RFA Response No. 129.)
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condition of the two companies, including balance sheet and capital position, as of the end of
September 2008. (Proxy Statement at 5-22, 34-51, 76-90; Merrill Lynch & Co., Inc., Third
Quarter Report 2008 (Form 10-Q) (Nov. 5, 2008) (“Merrill’s Q3/08 Report”), at 4-7
(incorporated by reference in Proxy Statement at 124).) The proxy and registration statement
rules required Bank of America and Merrill to describe “material changes” in Merrill’s affairs, if
any, that were not described in Merrill’s most recent annual, quarterly, or current reports.
(Securities Act Form S-4; Exchange Act Rule 14a-101 (Schedule 14A).) With respect to Merrill,
neither the Registration Statement nor the Proxy Statement, as of October 30, 2008, referenced
or described any material changes in Merrill’s financial performance that had occurred since the
most recent reports on Forms 10-K, 10-Q or 8-K that Merrill had filed with the Commission.
III. Nondisclosure of Merrill’s Fourth Quarter Losses
A. Merrill’s Third Quarter 2008 Results
11. On October 16, 2008, approximately two weeks before the Proxy Statement was
sent to shareholders, Merrill announced its results for the third quarter of the year. (P-Exh. 28
(Merrill Lynch & Co., Inc. Press Release, Merrill Lynch Reports Third-Quarter 2008 Net Loss
From Continuing Operations of $5.1 Billion (Oct. 16, 2008) (“Merrill Q3/08 Release”)); Merrill
Lynch & Co., Inc., Current Report (Form 8-K) (Oct. 16, 2008) (incorporated by reference in
Proxy Statement at 124).) These results were subsequently reported on Form 10-Q, which
Merrill filed with the Commission on November 5, 2008 and which was prospectively
incorporated by reference into the Proxy Statement. (Merrill’s Q3/08 Report; Proxy Statement at
124.) The third quarter financial results described in the Form 10-Q was the most up-to-date
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information Merrill publicly released about its financial results before the December 5
shareholder meetings to vote on the merger.
12. Merrill’s October 16 release reported a net loss of $5.2 billion in the third quarter
of 2008, reflecting, among other things, a $5.7 billion write-down from the sale of collateralized
debt obligations (“CDOs”) backed by subprime and other non-prime residential mortgages and
the termination and settlement of guarantees associated with those securities, as well as a $4.3
billion gain from Merrill’s sale of its interest in Bloomberg, L.P. (Merrill Q3/08 Release.) In
prior quarters, the CDOs on Merrill’s balance sheet were responsible for billion-dollar losses and
their sale in the third quarter was described by John Thain as one of the steps Merrill undertook
in order to “reduce exposures and de-leverage the balance sheet.” (Id.) In July 2008, John Thain
described the expected sale of the CDOs as a “significant milestone in our risk reduction efforts”
that “will materially enhance the company’s capital position and financial flexibility going
forward.” (Merrill Lynch & Co., Inc. Press Release, Merrill Lynch Announces Substantial Sale
of U.S. ABS CDOs Exposure Reduction of $11.1 Billion (Jul. 28, 2008); Merrill Lynch & Co.,
Inc., Current Report (Form 8-K) (Jul. 29, 2008) (incorporated by reference in Proxy Statement at
124).)
13. After Merrill released its third-quarter results, the price of its publicly-traded
stock rose slightly. In the days that followed, analysts covering Merrill issued reports estimating
that Merrill’s fourth-quarter performance would be an improvement over the firm’s $5.2 billion
loss in the third quarter. According to a summary of analyst reports that was available to Bank
of America, Sanford C. Bernstein analyst Bradley Hintz issued a report on October 17 estimating
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that Merrill would have a net gain of approximately $900 million in the fourth quarter;
Oppenheimer analyst Meredith Whitney estimated on October 20 that Merrill’s net income in the
fourth quarter would exceed $500 million; and UBS analyst Glenn Schorr estimated that Merrill
would have a quarterly net gain of approximately $400 million. (P-Exh. 123 (e-mail from David
Belk to Nicholas Demmo and Timothy Mayopoulos (Nov. 18, 2008), at BAC-ML-NYAG-502-
00000884).) Other analysts forecasted a loss at Merrill in the fourth quarter of 2008, but on a
smaller scale than the $5.2 billion loss sustained in the third quarter. For example, Kenneth
Worthington of J.P. Morgan estimated a net loss of $280 million; James Mitchell of Buckingham
Research estimated a loss of approximately $875 million; and Douglas Sipkin of Wachovia
Capital estimated a net loss of approximately $1.85 billion. (Id.) As of the end of the third
quarter of 2008, Lewis expected Merrill to approximately break even -- i.e., neither lose money
nor make a profit -- in the fourth quarter of 2008. (Lewis Tr. at 250.) Joe Price, Bank of
America’s then-Chief Financial Officer, expected at the time the merger was negotiated that
Merrill would “close to break even” in the fourth quarter of 2008. (Transcript of deposition of
Joe L. Price (Dec. 18, 2009) (“Price Tr.”) at 62.)
B. Merrill’s Losses Preceding the December 5 Shareholder Meeting
14. After the merger was announced on September 15, 2008, Neil Cotty, Bank of
America’s then-Chief Accounting Officer, received certain information concerning Merrill’s
financial performance consistent with Bank of America’s right to information under the terms of
the Merger Agreement. (Transcript of deposition of Neil A. Cotty (Dec. 16, 2009) (“Cotty Tr.”)
at 64-66; Merger Agreement, Section 6.2.) Cotty was the principal liaison between Merrill and
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Bank of America with respect to information about Merrill’s financial performance. (Price Tr. at
15. By the second week of November 2008, Cotty and Price were informed that
Merrill had closed its books for the month of October with a net loss of $4.5 billion driven by,
among other things, losses in the distressed part of Merrill’s correlation book and corporate loans
and by credit valuation adjustments (“CVA”) -- accounting entries reflecting the firm’s credit
exposure to certain of its counterparties. (Cotty Tr. at 94-95, 106; Curl Tr. at 199-200;
Transcript of deposition of Christopher B. Hayward (Dec. 22, 2009) (“Hayward Tr.”) at 134; P-
Exh. 240 (e-mail from Neil Cotty to Joe Price (Nov. 5, 2008), at BAC-ML-NYAG 10003554).)
The $4.5 billion monthly loss almost equaled the $5.2 billion loss that Merrill had reported for
the entire preceding quarter and represented more than one-third of the $11.7 billion in losses
that Merrill had reported for the first nine months of 2008. (Merrill Q3/08 Release.) After
receiving an e-mail attaching an earlier estimate of the October results, which reflected a $3.8
billion loss, Cotty forwarded the e-mail to Price and noted: “Read and weep.” (P-Exh. 240 (e-
mail from Neil Cotty to Joe Price (Nov. 5, 2008), at BAC-ML-NYAG 10003552).)
16. As set forth below, in the weeks that followed, Bank of America received further
forecasts estimating that Merrill sustained additional multi-billion dollar losses in the month of
November. On November 12, 2008, Merrill’s finance department provided Cotty with an
internal document that forecasted a fourth-quarter net loss of approximately $5.4 billion. (P-Exh.
271 (e-mail from Nancy Meloth to Neil Cotty (Nov. 12, 2008), at BAC-ML-NYAG 00005737).)
Cotty was aware that the forecast did not include either present valuations or forward-looking
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projections for some of Merrill’s most illiquid assets, such as the distressed part of Merrill’s
correlation trading book and CVA. (Cotty Tr. at 67-69; Hayward Tr. at 34-36.) The e-mail
transmitting the forecast to Cotty stated that the forecast did not include “additional marks CVA,
FVA (“Fair Value Adjustment”) or other significant market dislocation items” for the balance of
the fourth quarter. (P-Exh. 271 (e-mail from Nancy Meloth to Neil Cotty (Nov. 12, 2008), at
BAC-ML-NYAG 00005736).) According to Christopher Hayward, Merrill’s former Director of
Finance, Merrill’s management had concluded earlier in 2008 that, because of the turmoil in the
financial markets, valuations for such distressed assets could only be made with sufficient
integrity during the month-end closing process. (Hayward Tr. at 34-36, 52-54.) After receiving
the November 12 forecast, Cotty noted certain adjustments to add, including, among other items,
an estimated pre-tax loss of $1 billion in November in potential markdowns (identified as the
“neil gut”) from, among other things, the distressed part of Merrill’s correlation book and CVA,
as well as an expected $1.7 billion tax benefit, resulting in a projected quarterly loss of
approximately $5 billion; Cotty shared the adjusted forecast with Price. (Cotty Tr. at 110-111;
P-Exh. 160 (Merrill Lynch & Co. 2008 4Q & FY Forecast (Nov. 12, 2008), at BAC-ML-NYAG-
502-00001093).)4
Bank of America was also advised in mid-November that Merrill would be undertaking
a goodwill impairment analysis at the end of the quarter and that, given market conditions, a
potential goodwill writedown of approximately $2 billion might result. At the time, Merrill had
not reached any final conclusion that goodwill was to be impaired and, according to Cotty, Bank
of America’s finance management did not view this item as significant because any goodwill on
Merrill’s balance sheet would be eliminated upon the close of the transaction and the application
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17. Based on the revisions to the forecast for Merrill’s fourth-quarter performance,
Price sought the advice of Bank of America’s then-General Counsel, Timothy Mayopoulos, on
Bank of America’s disclosure obligations. (Price Tr. at 119; Transcript of deposition of Timothy
J. Mayopoulos (Dec. 10, 2009) (“Mayopoulos Tr.”) at 149-152.) Price also approached Thain
and Nelson Chai, Merrill’s then-Chief Financial Officer, to suggest that a disclosure may be
required. Thain and Chai rejected the suggestion, saying that Merrill ordinarily did not provide
shareholders with interim disclosures in the middle of a quarterly period. (Price Tr. at 120-121;
Cotty Tr. at 128-129; Thain Tr. at 233.) Merrill’s outside auditors, Deloitte & Touche, also
suggested that Merrill should consider the possibility of disclosure to David Moser, Merrill’s
Director of Accounting Policy, who then consulted with Merrill’s in-house lawyer, Richard
Alsop, on that issue; after considering the matter, Alsop and other in-house attorneys at Merrill
determined that no disclosure of the interim results should be made because, among other
reasons, such disclosure could be misleading given that the results were “estimates and
preliminary,” and in light of disclosure in Merrill’s public filings regarding the nature of its
assets and the market conditions. (Transcript of deposition of Rosemary Berkery (Dec. 9, 2009)
(“Berkery Tr.”) at 144-146.)
to the merger of purchase accounting principles, which provide that “[a]n acquiring entity shall
not recognize the goodwill previously recoded by an acquired entity.” (Statement of Financial
Accounting Standards No. 141, ¶ 38; e-mail from Nancy Meloth to Gary Carlin (Nov. 20, 2008),
at BAC-ML-NYAG 00011976.)
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18. Over the next several days, Mayopoulos, Price, and other executives and in-house
attorneys at Bank of America conferred amongst themselves as well as with Edward Herlihy,
Nicholas Demmo and other attorneys at Wachtell Lipton to determine whether a disclosure was
required in light of the forecasted $5 billion quarterly loss at Merrill. (Mayopoulos Tr. at 152,
157, 160, 164; Price Tr. at 126; Transcript of deposition of Nicholas Demmo (Nov. 16, 2009)
(“Demmo Tr.”) at 212-214; Transcript of deposition of Edward D. Herlihy (Nov. 17, 2009)
(“Herlihy Tr.”) at 155-157.) Notes of a Wachtell Lipton attorney reflect that the initial view of
the lawyers on November 13 was that there should be some additional disclosure. (P-Exh. 161
(handwritten notes of Eric Roth (Nov. 13, 2008), at HOGR-WLRK-502-00000924.) Thereafter,
the attorneys and executives reviewed and analyzed, among other materials, Merrill’s results in
the preceding six quarters, analyst estimates for Merrill’s results in the fourth quarter, as well as
the Proxy Statement and other recent Bank of America and Merrill public filings that were
available to shareholders. (Mayopoulos Tr. at 166-167; Price Tr. at 126.) On November 20, the
lawyers concluded that no additional disclosure was required. (Mayopoulos Tr. at 169, 191-192;
Price 126-130; Herlihy Tr. at 156-157.) Price informed Lewis of the conclusion reached by the
lawyers.5 (Lewis Tr. at 263-264.)
Price was also approached, in or around late November, by Jeffrey Brown, Bank of
America’s then-Treasurer, who raised the possibility of disclosing Merrill’s fourth quarter losses;
after Price advised Brown that he had consulted the Bank’s attorneys on the issue, Brown
suggested that, as a practical matter, disclosure may be advisable. Bank of America did not
make any disclosure of Merrill’s October losses or estimated November losses before the
December 5 shareholder vote.
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19. An important reason for the lawyers’ conclusion that no additional disclosure was
necessary was that the forecasted $5 billion quarterly loss at Merrill was within the range of
losses that Merrill had sustained in prior quarters. (Mayopoulos Tr. at 191-192; Merrill’s Q3/08
Report at 76-77; Merrill Lynch & Co., Inc., Second Quarter Report 2008 (Form 10-Q) (Aug. 5,
2008), at 73-74; Merrill Lynch & Co., Inc., First Quarter Report 2008 (Form 10-Q) (May 6,
2008), at 66-67; Merrill Lynch & Co., Inc., Press Release, Merrill Lynch Reports Full-Year 2007
Net Loss From Continuing Operations of $8.6 Billion (Jan. 17, 2008); Merrill Lynch & Co., Inc.,
Third Quarter Report 2007 (Form 10-Q) (Nov. 7, 2007), at 71-72.) In the five quarters preceding
the fourth quarter of 2008, Merrill’s results ranged from a net loss of approximately $10 billion
(in the fourth quarter of 2007) to a net loss of approximately $2 billion (in the first quarter of
2008). (Id.; P-Exh. 162 (e-mail from David Belk to Greg Curl, Joe Price and Timothy
Mayopoulos (Nov. 19, 2008), at BAC-ML-NYAG-502-00000896).) Before the third quarter of
2007, however, Merrill had not sustained a quarterly loss in six years. In the second quarter of
2007, Merrill reported net earnings of $2.1 billion, and in the quarter before that, net earnings of
$2.2 billion. (Merrill Lynch & Co., Inc., Second Quarter Report 2007 (Form 10-Q) (Aug. 3,
2007), at 59-61; Merrill Lynch & Co., Inc., First Quarter Report 2007 (Form 10-Q) (May 7,
2007), at 57-59.) Similarly, in 2006, Merrill reported record annual net earnings of
approximately $7.5 billion, with quarterly net gains ranging from $475 million (in the first
quarter of 2007) to $3 billion (in the third quarter of 2007). (Merrill Lynch & Co., Inc., Annual
Report 2006 (Form 10-K) (Feb. 26, 2007), at 28; Merrill Lynch & Co., Inc., Third Quarter
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Report 2006 (Form 10-Q) (Nov. 3, 2006), at 46-48; Merrill Lynch & Co., Inc., First Quarter
Report 2006 (Form 10-Q) (May 5, 2006), at 40-42.)
20. In addition to looking to Merrill’s prior quarterly results, the lawyers concluded
that the Proxy Statement and related filings, which described the challenging market
environment and the adverse impact that Merrill could experience as a result, provided sufficient
warning to shareholders, as did the distressed condition of the financial markets at the time.
(Mayopoulos Tr. at 170-171, 191-192; Price Tr. at 130; Herlihy Tr. at 156-157; Transcript of
deposition of Teresa Brenner (Dec. 4, 2009) (“Brenner Tr.”) at 285-286.) Merrill’s Form 10-Q
for the third quarter of 2008 stated that “[t]urbulent market conditions in the short- and medium-
term will continue to have an adverse impact on our core businesses.” (Merrill’s Q3/08 Report
at 83.)
21. According to Mayopoulos, the lawyers considered the disclosure of Merrill’s
forecasted quarterly performance trend to be unreliable and risky, but he did not recall
considering disclosing solely the $4.5 billion loss that Merrill had sustained in the month of
October, for which the books had been closed. (Mayopoulos Tr. at 163-164, 185-188, 192-193.)
According to Mayopoulos, the lawyers working for him also did not ask for updates concerning
Merrill’s situation as of November 20, the day they determined that no disclosure was necessary.
(Mayopoulos Tr. at 196-197; Price Tr. at 138; P-Exh. 160 (Merrill Lynch & Co. 2008 4Q & FY
Forecast (Nov. 12, 2008), at BAC-ML-NYAG-502-00001092).)
22. On December 1, in an e-mail to Price concerning Merrill’s fourth quarter forecast,
Cotty reported that Merrill was “still not done with the[] November close,” and noted that he had
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“put a place holder of $1.0B loss for incremental marks,” including CVA, in the month of
November, as well as an additional $1 billion for forecasted losses in December. (P-Exh. 243 (e-
mail from Neil Cotty to Joe Price (Dec. 1, 2008), at BAC-ML-NYAG 00005952).) With the
November placeholder and December forecast, Cotty estimated that Merrill’s fourth-quarter net
loss would be $7.4 billion, and Cotty added that “you could easily take another $1.0 billion off
on an after tax basis.” (Id.)
23. On December 3, two days before the shareholder meeting, Cotty and Price
received an updated report from Merrill’s finance department reflecting an estimated net loss of
$6.4 billion for the months of October and November, and forecasting an overall quarterly net
loss of over $7 billion. (Cotty Tr. at 145-147; Price Tr. at 173-174; P-Exh. 47 (Merrill Lynch &
Co., 2008 4Q Pacing & FY Forecast Scenario (Dec. 3, 2008), at BAC-ML-NYAG 10016113).)
In an afternoon meeting with Lewis, Thain, and Price, at which Merrill’s quarterly forecast was
discussed, Cotty suggested adding a $3 billion “plug” for additional possible markdowns for
estimated losses in November and for potential losses in the balance of the quarter. (Cotty Tr. at
152-153, 158, 160-161; Price Tr. at 182-183; Lewis Tr. at 261-262.) Of that plug, a $2 billion
placeholder, on a pre-tax basis, was allocated to the November results to reflect estimated losses
from marks on Merrill’s distressed correlation book and CVA, which were not included in the
forecast provided by Merrill. (Cotty Tr. at 158, 160-161; P-Exh. 53 (Merrill Lynch & Co., 2008
4Q Pacing & FY Forecast Scenario (Revised 6PM) (Dec. 3, 2008), at BAC-ML-NYAG
00006334.) Before the afternoon meeting, Merrill informed Cotty that losses associated with
these marks should be expected. (Cotty Tr. at 160-161.) The remaining $1 billion from the plug
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was allocated to the forecast to reflect potential losses in the month of December. (Cotty Tr. at
153, 158.) Lewis and Thain agreed that the $3 billion in losses should be added to the forecast
and, later that day, Merrill’s finance department generated a revised forecast that projected a
quarterly net loss at Merrill of $8.9 billion. (Lewis Tr. at 263; Cotty Tr. at 164; P-Exh. 53
(Merrill Lynch & Co., 2008 4Q Pacing & FY Forecast Scenario (Revised 6PM) (Dec. 3, 2008),
at BAC-ML-NYAG 00006334.)
24. After receiving the December 3 forecast, Price again consulted Mayopoulos to
determine if the updated forecast required additional disclosure to investors. (Price Tr. at 175-
178; Mayopoulos Tr. at 205-206.) Mayopoulos advised that no disclosure was required because,
in his view, the fundamental facts on which the analysis was based had not changed, including
the rationale that the forecasted quarterly loss, although larger than the loss he had previously
been consulted upon, was still within the $2 billion to $10 billion range of net losses that Merrill
had sustained in prior quarters.6 (Price Tr. at 176-179; Mayopoulos Tr. at 210-211.)
25. The following day, December 4, Cotty was informed that approximately $800
million of the $2 billion November placeholder had been recorded, as part of the book closing
process for November, in losses on Merrill’s distressed correlation book. (Cotty Tr. at 177; Price
According to Price, he provided Mayopoulos with the forecast number after the plug
had been included, that is, approximately $9 billion after tax; however, Mayopoulos recalled
being given a forecast number of $7 billion after tax, which would have corresponded with the
forecast number before the $3 billion pre-tax plug for November and December was added.
(Price Tr. at 175-176; Mayopoulos Tr. at 205-206.)
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Tr. at 186-187; P-Exh. 245 (e-mail from Neil Cotty to Joe Price and Craig Rosato (Dec. 4, 2008),
at BAC-ML-NYAG 10007358).) Although Merrill’s books for November were not yet
finalized, this update, which included certain other losses, brought the estimated net loss in the
month of November to approximately $3 billion, leaving $1.2 billion in the placeholder for that
month for additional estimated losses from CVA. (Price Tr. at 187; Cotty Tr. at 178.) With this
update, the known and estimated losses at Merrill in October and November were over $7.5
billion. After receiving this update, Bank of America did not consider, or seek the advice of
counsel to determine, whether the updated losses affected the previous conclusion that no
additional disclosure was necessary. (Price Tr. at 191-193; Mayopoulos Tr. at 213-214.)
26. The actual November results, which were finalized after the December 5, 2008
shareholder meeting, turned out to be worse than forecasted. On the evening of December 5,
Hayward e-mailed Cotty to inform him that his “best guess” for the November CVA marks was
$950 million more than the remaining $1.2 billion in the placeholder that was added to Merrill’s
forecast on December 3 for estimated losses from CVA in November. (E-mail from Christopher
Hayward to Neil Cotty (Dec. 6, 2008), at BAC-ML-NYAG 00010040.) Bank of America
received this information after the shareholder vote on December 5 as part of Merrill’s normal
month-end closing process, which was not accelerated in anticipation of the shareholder vote.
(Id.; Cotty Tr. at 185-188.) On December 7, 2008, Gary Carlin, Merrill’s then-Controller,
forwarded a report providing an update on the November results to Cotty showing a pre-tax
monthly loss of $5.8 billion, and noted: “What a disaster!” (Lewis Tr. at 54; Cotty Tr. at 179-
180; P-Exh. 54 (e-mail from Gary Carlin to Neil Cotty (Dec. 7, 2008), at BAC-ML-NYAG
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 38 of 53
00028113).) The $2 billion placeholder for incremental marks in November, which was added to
the forecast on December 3, was ultimately surpassed by $980 million. (P-Exh. 274 (e-mail
from Nancy Meloth to Neil Cotty (Dec. 12, 2008), at BAC-ML-NYAG 00005790).)
C. Shareholder Meetings and Subsequent Disclosure of Merrill’s Losses
27. Bank of America and Merrill held their shareholder meetings on December 5,
2008; the shareholders of both companies voted to approve the merger. (Bank of America Corp.,
Current Report (Form 8-K) (Dec. 5, 2008); Merrill Lynch & Co., Inc., Current Report (Form 8-
K) (Dec. 5, 2008); Bank of America Corp., Press Release, Bank of America Shareholders
Approve Merrill Lynch Purchase (Dec. 5, 2008); Merrill Lynch & Co., Inc., Press Release,
Merrill Lynch Stockholders Approve Transaction With Bank of America (Dec. 5, 2008)
(collectively, “12/5 Releases”).) Prior to the shareholder meetings, Bank of America did not
make any disclosure, or otherwise update the information previously provided to shareholders,
concerning Merrill’s losses in October and estimated losses in November.
28. By the time of the shareholder meeting, as a result of Bank of America’s
declining stock price, the total value of the merger transaction had diminished to approximately
$21.5 billion. (Curl Tr. at 225.) Without Bank of America having made any disclosure of the
October losses and estimated November losses, Bank of America’s shareholders voted to
approve the merger on terms that had been originally negotiated in September. (12/5 Releases.)
The merger between Bank of America and Merrill closed on January 1, 2009. (Bank of America
Corp., Current Report (Form 8-K) (Jan. 2, 2009), at 1; Bank of America Corp., Press Release,
Bank of America Completes Merrill Lynch Purchase (Jan. 1, 2009).)
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29. On December 12, 2008, Bank of America received an updated report forecasting a
net loss of $12.5 billion at Merrill in the fourth quarter of 2008. (Price Tr. at 204-207; Curl Tr. at
207; P-Exh. 227 (Merrill Lynch & Co. 4Q08F Walkdown as of close of business Dec. 10, 2008,
at BAC-ML-NYAG 00003669).) The December 12 forecast included updated estimates for
potential markdowns and, among other things, replaced the $1 billion portion of the plug that had
been allocated for December with estimated markdowns on various portfolios that totaled $2.8
billion. (P-Exh. 227 (Merrill Lynch & Co. 4Q08F Walkdown as of close of business Dec. 10,
2008, at BAC-ML-NYAG 00003669).) Shortly after receiving this update, Bank of America’s
senior management, including Lewis, Curl, and Price consulted outside counsel about the
possibility of terminating the Merger Agreement with Merrill on the ground that a material
adverse effect under the Merger Agreement had occurred in Merrill’s financial condition since
September 15, 2008. (Price Tr. at 204-207; Curl Tr. at 207-208; Demmo Tr. at 217-18; Herlihy
Tr. at 182.)
30. On January 16, 2009, two weeks after the merger closed, Bank of America
disclosed Merrill’s performance in the fourth quarter of 2008. The Bank issued a release
reporting that Merrill had sustained a net loss of $15.3 billion in the fourth quarter of 2008, the
largest quarterly loss in the firm’s history, and that the Bank had obtained $20 billion in funds
under the U.S. Treasury Department’s Troubled Asset Relief Program to assist in the acquisition
of Merrill. (Bank of America Corp., Press Release, Bank of America Earns $4 Billion in 2008
(Jan. 16, 2009); BOA’s RFA Response No. 78.) On the next trading day, Bank of America’s
stock price dropped by 29 percent, although it recovered some of its value in the following days.
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IV. Nondisclosure of the Agreement on Year-End Bonuses
A. Negotiation and Agreement on VICP Bonuses
31. During the merger negotiations, one issue addressed by the lead negotiators for
Bank of America and Merrill was Merrill’s ability to pay discretionary year-end bonuses to its
employees and executives for the fiscal year 2008. The first business issue Fleming and Curl
focused on was the price that Bank of America would pay to acquire Merrill. (Fleming Tr. at
125-126; Curl. Tr. at 72-73, 75-76.) The discussions on the afternoon of Sunday, September 14,
resulted in the parties’ agreement to present to their respective Boards an agreement reflecting an
0.8595 exchange ratio of Bank of America to Merrill shares, which equated to a $29 price for
each Merrill share based on the closing price for shares of Bank of America common stock on
the New York Stock Exchange on September 12, 2008. (Proxy Statement at 50; Merger
Agreement, Section 1.4.)
32. After reaching agreement on the acquisition price, Fleming and Curl proceeded to
negotiate other business terms. (Fleming Tr. at 146-147; Curl Tr. at 91-106.) According to
Thain and Fleming, aside from price, the negotiation focused on the scope of the Merger
Agreement’s material adverse change clause, a retention package for Merrill’s financial advisors,
and Merrill’s right to pay discretionary year-end awards pursuant to its Variable Incentive
Compensation Program (“VICP”), the firm’s annual bonus program for executives, professional
associates, and administrative employees. (Fleming Tr. at 126-127, 130-131; P-Exh. 175 (John
Thain remarks, Wharton School of Business (Sept. 17, 2009)).) Fleming and Curl also
negotiated and agreed on several other matters, including the number of directors that Bank of
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America would allocate to Merrill, the location of headquarters, remedies for breach of the
Merger Agreement, and certain closing conditions. (Curl Tr. at 91-106; Fleming Tr. at 155-156;
P-Exh. 8 (e-mail from Seth Heaton to John Thain (Sept. 14, 2008), at BAC-ML-NYAG
00006022).)
33. With respect to VICP, Fleming and Curl agreed that Merrill would have the
authority to pay year-end VICP awards for 2008 up to the same amount Merrill had paid for
2007. (Curl Tr. at 94-96; Fleming Tr. at 161; Transcript of deposition of Jeannemarie O’Brien
(Nov. 20, 2009) (“O’Brien Tr.”) at 111-112.) This agreement was reflected in the initial draft of
a schedule to the Merger Agreement as “VICP for 2008 (at 2007 levels) on terms agreed by the
parties.” (P-Exh. 143 (e-mail from Nicholas Demmo (Sept. 15, 2008), at BAC-ML-NYAG-502-
00001365).) In dollar terms, this agreement provided that Merrill’s VICP awards for 2008 may
be awarded at levels of up to $5.8 billion in aggregate value and with a current year expense of
up to $4.5 billion. (Curl Tr. at 160; Fleming Tr. at 220; P-Exh. 14 (e-mail from Nicholas
Demmo to Teresa Brenner (Nov. 20, 2008), at BAC-ML-NYAG-502-00000913).) According to
draft minutes, at the meeting of Merrill’s Board of Directors on the evening of Sunday,
September 14, Thain informed the Board members that Bank of America had agreed to grant
Merrill the right to maintain the 2008 VICP pool at the same level as that of 2007. (P-Exh. 141
(e-mail from Adam Hakki (Oct. 2, 2008), at BAC-502-SS 00002800).)
B. The Drafting of the VICP Provision and Proxy Statement
34. On Sunday, September 14, 2008, the Wachtell Lipton attorneys representing Bank
of America in the merger provided an initial draft of the Merger Agreement to John Madden,
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John Marzulli, and other attorneys from Shearman & Sterling LLP (“Shearman”), the law firm
retained to represent Merrill in the merger. (Demmo Tr. at 37-38, 62; O’Brien Tr. at 130-31;
Transcript of deposition of John A. Marzulli, Jr. (Nov. 24, 2009) (“Marzulli Tr.”) at 16-17;
Transcript of deposition of Jeffrey P. Crandall (Nov. 30, 2009) (“Crandall Tr.”) at 136.) The
initial draft of Section 5.2 of the Merger Agreement, entitled “Company Forbearances”
(“Forbearance Provision”), provided, in the introductory paragraph, that “except as set forth in
Section 5.2 of the Company Disclosure Schedule and except as expressly contemplated or
permitted by this Agreement,” Merrill “shall not . . . without the prior written consent of [Bank
of America]” take any of a number of enumerated actions before the closing of the merger. (P-
Exh. 143 (e-mail from Nicholas Demmo (Sept. 15, 2008), at BAC-ML-NYAG-502-00001336-
1337).) Among the list of actions that followed, clause 5.2(c)(ii) of the proposed Forbearance
Provision prohibited Merrill from paying, without Bank of America’s consent, “any amounts to
Employees not required by any current plan or agreement (other than base salary in the ordinary
course of business).” (Id.)
35. After receiving the initial draft from Wachtell Lipton, Jeffrey Crandall, a
Shearman attorney responsible for negotiating employee benefits matters, deleted clause
5.2(c)(ii). (Crandall Tr. at 78-83.) According to Crandall, he objected to the clause because
“Merrill Lynch had a business to run and basically this provision would require [Merrill] to go
back to Bank of America for consent on everything including, for example, de minimis things
like expense reimbursements and the like.” (Crandall Tr. at 108.) Crandall also found the
Forbearance Provision to be confusing with respect to Merrill’s ability to pay incentive
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compensation. (Crandall Tr. at 111-112.) After Crandall, Marzulli, and other attorneys from
Shearman reviewed the initial draft of the Merger Agreement, they provided a handwritten
markup to Wachtell Lipton reflecting Crandall’s deletion of clause 5.2(c)(ii). (P-Exh. 143 (e-
mail from Nicholas Demmo (Sept. 15, 2008), at BAC-ML-NYAG-502-00001337, BAC-ML-
NYAG-502-00001365).) Concurrently, Shearman provided Wachtell Lipton with a draft
disclosure schedule to the Merger Agreement (“Schedule”),7 which provided in Section 5.2 as
follows: “VICP for 2008 (at 2007 levels) on terms agreed by the parties.” (Id.)
36. Wachtell Lipton rejected Crandall’s proposed deletion and struck out the
proposed provision in the Schedule. (Demmo Tr. at 74; O’Brien Tr. at 119-120; Transcript of
deposition of Jonathan Santelli, December 18, 2009 (“Santelli Tr.”) at 67; P-Exhs. 106 (e-mail
from Mark Veblen to Teresa Brenner (Sept. 15, 2008), at BAC-ML-NYAG-502-00000010), 248
(e-mail from Joanne Tsung to Michael Rubinoff (Sept. 16, 2008), at BAC-ML-NYAG-502-
00005668).) According to Jeannemarie O’Brien, the Wachtell Lipton attorney responsible for
Disclosure schedules have been used in corporate practice as a means of, among other
things, protecting the business interests of the parties to a transaction and allocating the risk of
non-consummation between them. (Crandall Tr. at 22-26; O’Brien Tr. at 18-19; Transcript of
deposition of Patricia Kuhn (Dec. 21, 2009) at 19.) Wachtell Lipton, Shearman, and other law
firms have in the past placed certain confidential compensation-related information in disclosure
schedules to merger agreements. (Crandall Tr. at 23; O’Brien Tr. at 40; Marzulli Tr. at 92-93.)
The full text of disclosure schedules are rarely included in proxy materials that are distributed to
shareholders but, as the attorneys from Wachtell Lipton and Shearman acknowledge, the federal
proxy rules require that “[s]chedules (or similar attachments) to [merger agreements] shall not be
filed unless such schedules contain information which is material to an investment decision and
which is not otherwise disclosed in the agreement or the disclosure document.” (Regulation S-K
Item 601(b)(2); Crandall Tr. at 54-55; Herlihy Tr. at 114-115.)
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negotiating the documentation of employee benefits provisions, Bank of America wanted to
retain clause 5.2(c)(ii) in the Forbearance Provision of the Merger Agreement because the Bank
wanted to “be involved in the process” of Merrill’s determination of overall incentive
compensation for 2008. (O’Brien Tr. at 95-96.) In addition, Wachtell Lipton struck out
Shearman’s proposed provision in the Schedule. According to Curl and O’Brien, Bank of
America originally expected to work this issue out over the interim period as an integration
matter. (Curl Tr. at 95, 100, 104, 129, 140; O’Brien Tr. at 52, 97, 134; P-Exhs. 108 (email from
Greg Curl to Timothy Mayopoulos (Sept. 17, 2008), at BAC-ML-NYAG-502-00001122), 134
(e-mail from Michael Krasnovsky to Lester Ranson and Raleigh Shoemaker (Sept. 17, 2008), at
BAC-502-WLRK 00008484).)
37. After further negotiations, Merrill’s counsel agreed to keep clause 5.2(c)(ii) in the
Forbearance Provision of the Merger Agreement, and Bank of America’s counsel agreed, in turn,
to include a provision concerning Merrill’s VICP awards for 2008 in the Schedule. (Crandall Tr.
at 117-118, 123, 145; P-Exh. 148 (e-mail from Margaret Nelson (Sept. 15, 2008), BAC-ML-
NYAG-502-00000001).) The final version of the Forbearance Provision thus provided, in the
introductory paragraph, that “except as set forth in this Section 5.2 of the Company Disclosure
Schedule or except as expressly contemplated or permitted by this Agreement,” Merrill “shall
not . . . without the prior written consent of [Bank of America]” take any of seventeen
enumerated actions before the closing of the merger, including “pay any amounts to [directors,
officers or employees] not required by any current plan or agreement (other than base salary in
the ordinary course of business).” (Merger Agreement, Section 5.2.) Although the Forbearance
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Provision as a whole referred to exceptions in Section 5.2 of the Schedule, there was no
disclosure in the Merger Agreement concerning the specific language of those exceptions or
which of the seventeen enumerated actions were subject to those exceptions. (BOA’s RFA
Responses Nos. 51, 52.)8
38. The text of the Proxy Statement, in a section describing the principal terms of the
Merger Agreement, paraphrased the Forbearance Provision, and described as “extraordinary
actions” the seventeen prohibited actions that Merrill had agreed not to take before the closing of
the merger, including the payment of discretionary compensation. (Proxy Statement at 83-85.)9
The proxy statement collectively qualified all seventeen “extraordinary actions” by referring to
“certain exceptions,” without specifying the language of those exceptions, and stated that Merrill
was prohibited from taking any of those actions without “Bank of America’s prior written
consent (which consent will not be unreasonably withheld or delayed with respect to certain of
The final version of the Merger Agreement also contained Section 5.1, which provided
that: “Company and Parent shall . . . (a) conduct its business in the ordinary course in all material
respects, (b) use reasonable best efforts to maintain and preserve intact its business organization
and advantageous business relationships and retain the services of its key officers and key
employees and (c) take no action that would reasonably be expected to adversely affect or
materially delay the ability of Company . . . to perform its covenants and agreements under this
Agreement or to consummate the transactions contemplated hereby or thereby.” (Merger
Agreement, Section 5.1.)
Immediately before this language, the Proxy Statement paraphrased Section 5.1 of the
Merger Agreement as follows: “In general . . . Merrill Lynch agree[s] to (1) conduct its business
in the ordinary course in all material respects, [and] (2) use reasonable best efforts to maintain
and preserve intact its business organization and advantageous business relationships, including
retaining the services of key officers and employees.” (Proxy Statement at 83.)
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the actions described below).” (Proxy Statement at 83.)
39. The language of the provision in the Schedule relating to VICP awards for 2008
continued to be negotiated through October 21, 2008. (Crandall Tr. at 145-146.) On October 4,
after an issue arose concerning the understanding reached on September 14 with respect to VICP
for 2008, Curl confirmed to Fleming in a telephone conversation that Merrill had the authority to
pay up to $5.8 billion in year-end VICP awards with a recorded expense of up to $4.5 billion.
(Fleming Tr. at 200-201; Curl Tr. at 160; P.-Exh. 12 (e-mail from Greg Fleming to John Thain et
al. (Oct. 4, 2008), at BAC-ML-NYAG-502-00000844).) The governing Schedule provision,
which was finalized on October 21, 2008, provided as follows:
5.2(b)(iii), 5.2(c)(i), and 5.2(c)(ii) – Variable Incentive Compensation
Program (“VICP”) in respect of 2008 (including without limitation any
guaranteed VICP awards for 2008 or any other pro rata or other 2008
VICP awards payable, paid or provided to terminating or former
employees) may be awarded at levels that (i) do not exceed $5.8
billion in aggregate value (inclusive of cash bonuses and the grant date
value of long-term incentive awards) … and (ii) do not result in 2008
VICP-related expense exceeding $4.5 billion … Sixty percent of the
overall 2008 VICP shall be awarded as a current cash bonus and forty
percent of the overall 2008 VICP shall be awarded as a long-term
incentive award either in the form of equity or long-term cash awards.
The form (i.e., equity v. long-term cash) and terms and conditions of
the long-term incentive awards shall be determined by [Merrill] in
consultation with [Bank of America] … The allocation of the 2008
VICP among eligible employees shall be determined by [Merrill] in
consultation with [Bank of America].
(Demmo Tr. at 130; O’Brien Tr. at 169-170; P-Exh. 138 (e-mail from Ross Fieldston to Gaurav
Sud and James Cuneo (Nov. 19, 2008), at BAC-ML-WLRK 00023488).)
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40. Although the Proxy Statement included the full text of the Merger Agreement as
an attachment, it did not include as an exhibit the Schedule setting forth, among other things, the
provision concerning VICP awards for 2008. (Proxy Statement, Appendix A; BOA’s RFA
Response No. 44.) Neither the Schedule nor the provision concerning VICP were publicly
disclosed prior to the December 5 meeting of Bank of America’s shareholders to approve the
merger. (BOA’s RFA Response No. 40.) According to O’Brien, the provision in the Schedule
did not have to be disclosed because, she believed, the VICP awards that Merrill was authorized
to pay under Section 5.2 of the Schedule were not special transactional bonuses and were regular
year-end bonuses consistent with the prior year. (O’Brien Tr. at 174-175.) However, although
Wachtell Lipton attorneys provided drafts of the Proxy Statement and Schedule to Bank of
America’s management and in-house lawyers, they did not actually discuss this question with the
Bank’s executives and in-house counsel as no one expressly raised the question during the
preparation of the Bank’s proxy disclosures. (O’Brien Tr. at 185; Demmo Tr. at 123-124.)
Lewis, Mayopoulos and certain other members of Bank of America’s management, Board, and
in-house legal department asserted that they generally relied on Wachtell Lipton for the
accuracy, completeness, and legal compliance of the Bank’s proxy disclosures. (Lewis Tr. at
189, 197-198, 245, 256-258; Mayopoulos Tr. at 62-64; Transcript of deposition of Jana Litsey
(Dec. 23, 2009) at 24; Transcript of deposition of Thomas J. May (Dec. 18, 2009) at 66-67;
Transcript of deposition of Charles K. Gifford (Dec. 18, 2009) at 38; BOA’s RFA Response No.
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C. Acceleration of the Bonuses
41. Shortly after the September 15 announcement of the merger, Merrill’s
management began working on a schedule for the payment of year-end VICP awards for 2008.
By late September, Peter Stingi, Merrill’s then-Global Head of Human Resources, had prepared
an accelerated schedule for the approval of the VICP bonus pool. (Stingi Tr. at 126-128; P-Exhs.
16 (e-mail from Greg Fleming to John Thain (Oct. 2, 2008), at BAC-ML-NYAG 00006044), 17
(e-mail from Peter Stingi (Sept. 29, 2008), at BAC-ML-NYAG 00007580).) In prior years,
Merrill customarily made final decisions on the size of the bonus pool in January following the
year for which bonuses were paid, in part to allow the Management Development and
Compensation Committee of Merrill’s Board of Directors (“MDCC”)10 to consider the firm’s
full-year financial performance. (Stingi Tr. at 54-55, 58; Fleming Tr. at 44-50; Finnegan Tr. at
16-17; BOA’s RFA Response No. 69-70.) Under the accelerated schedule that Stingi prepared
for VICP 2008, the MDCC was scheduled to authorize the VICP pool on December 8, more than
three weeks before the end of the year for which the bonuses were to be paid and before the
closing of the merger with Bank of America. (Fleming Tr. at 242-245; P-Exh. 16 (e-mail from
Greg Fleming to John Thain (Oct. 2, 2008), at BAC-ML-NYAG 00006044).)
In 2008, the MDCC was chaired by John Finnegan and included as members Armando
Codina, Virgis Colbert, Alberto Cribiore, and Aulana Peters. (Transcript of deposition of John
Finnegan (Dec. 10, 2009) (“Finnegan Tr.”) at 19; Merrill Lynch & Co., Inc., Definitive Proxy
Statement 2007 (Schedule 14A) (Mar. 14, 2008), at 6-8, 17-18.)
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42. The acceleration of the schedule meant that the MDCC, which was to be
disbanded together with Merrill’s Board of Directors after the merger closed, would make final
decisions on the VICP pool rather than the Board of Bank of America, even though the MDCC
did not necessarily have the same compensation philosophy as Bank of America. (Stingi Tr. at
128-131; Transcript of deposition of John Steele Alphin (Nov. 13, 2009) (“Alphin Tr.”) at 56-
64.) According to Steele Alphin, Bank of America’s Chief Administrative Officer, Bank of
America’s Board historically had been more conservative in determining incentive compensation
for employees and, as a predominantly commercial bank, focused on company-wide earnings as
its primary consideration in determining incentive compensation. (Alphin Tr. at 57.) According
to Stingi, investment banks such as Merrill typically placed greater emphasis on overall revenues
in setting bonuses, often allocating a flat percentage of overall revenues towards the bonus pool.
(Stingi Tr. at 36-37.) Merrill typically paid, according to Alphin, more than Bank of America to
employees in comparable positions, including investment bankers. (Alphin Tr. at 62-64.)11
For example, for 2008, Bank of America paid bonuses of $1 million or more to less
than 200 employees, $5 million or more to approximately 10 employees, and $10 million or
more to less than 5 employees. (BOA’s RFA Responses Nos. 88-90.) By comparison, Merrill
paid $1 million or more in year-end bonuses to nearly 700 employees, $5 million or more to over
50 employees, and $10 million or more to over 10 employees. (BOA’s RFA Responses Nos. 85-
87.) The two companies also had differences in their practices concerning executive
compensation, with Merrill typically paying its senior executives more than Bank of America
paid its executives officers. (Alphin Tr. at 60-61.) For example, although Bank of America had
never paid Lewis annually more than $30 million, in the fiscal years 2005 and 2006, Merrill paid
Stanley O’Neal, its former Chairman and Chief Executive Officer, $37 million and $48 million
respectively, and at the time O’Neal departed in late 2007, the value of his stock holdings
awarded by the MDCC was in excess of $161 million. (Alphin Tr. at 60-61; Finnegan Tr. at 20-
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43. In the fall of 2008, following the announcement of the merger with Merrill, Lewis
publicly criticized the levels of executive and staff pay on Wall Street as being too high, and
stated that Wall Street executive compensation should be “cut back.” (P-Exhs. 42 (CBS ‘60
Minutes’ (Oct. 19, 2008), Under New Ownership: Bank of America, CEO of the Nation’s
Largest Bank Talks About the Treasury Department’s Plans for Buying Into Financial Firms), 43
(Fortune Magazine (Sept. 29, 2008), The Golden Age for Financial Services is Over: The New
Most Powerful Man in Finance, Bank of America CEO Ken Lewis, Talks About the Future of
Wall Street and the Economy.)
44. On November 11, 2008, Thain, Stingi, and other Merrill executives presented to
the MDCC an accelerated schedule under which final approval of the bonus pool would occur on
December 8, bonus communications would occur on December 22, cash awards would be made
on December 31, and stock awards in early 2009. (Finnegan Tr. at 100-102; Thain Tr. at 161-
162; Transcript of deposition of Michael P. Ross (Dec. 16, 2009) (“Ross Tr.”) at 66-70; P-Exh.
61 (memorandum from John Thain (Nov. 10, 2008), at BAC-ML-NYAG 00000055).) The
members of the MDCC consented to the schedule, and Bank of America was advised the
following day. (Transcript of deposition of Andrea B. Smith (Nov. 9, 2009) (“Smith Tr.”) at
100-101, 109; P-Exh. 68 (e-mail from Michael Ross to Greg Fleming (Nov. 12, 2008), at BAC-
ML-NYAG 00005717, BAC-ML-NYAG 00005721).)
24; P-Exhs. 192 (Merrill Lynch & Co., Inc., Definitive Proxy Statement 2005 (Schedule 14A)
(Mar. 10, 2006) at 42, 193 (Merrill Lynch & Co., Inc., Definitive Proxy Statement 2006
(Schedule 14A) (Mar. 16, 2007) at 46, 194 (Merrill Lynch & Co., Inc., Definitive Proxy
Statement 2007 (Schedule 14A) (Mar. 14, 2008) at 33.)
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 51 of 53
45. Under the schedule approved by the MDCC, Merrill planned to make final bonus
determinations, and approve the VICP bonus pool, in early December 2008, before the full
year’s results were known and before the merger with Bank of America was scheduled to close.
(P-Exh. 61 (memorandum from John Thain (Nov. 10, 2008), at BAC-ML-NYAG 00000055).
This timeline, which represented a departure from Merrill’s typical VICP schedule in previous
years, was not disclosed to shareholders prior to the December 5, 2008 meeting to approve the
D. Payment of the Bonuses
46. On October 15, 2008, Stingi sent an email to Fleming with a proposal under
which Merrill would “spend the full $5.8 billion” permitted under Section 5.2 of the Schedule.
(P-Exh. 85 (e-mail from Peter Stingi to Michael Ross (Oct. 15, 2008), at BAC-ML-NYAG
00007720).) Stingi also noted that John Finnegan, the Chairman of Merrill’s MDCC, “would
like to see less.” (Id.) Stingi’s proposal was not provided to the MDCC. (Stingi Tr. at 171.)
47. In the following weeks, Merrill’s management decreased the size of the proposed
VICP pool due to Merrill’s deteriorating financial performance and information about
competitors’ pay plans. (Stingi Tr. at 175; Finnegan Tr. at 96-97.) On October 27, 2008, the
MDCC met for the first time since the Merger Agreement was signed to review a proposed VICP
pool of approximately $4.7 billion with an associated expense of approximately $3.7 billion.
(Finnegan Tr. at 78-90; P-Exh. 21 (Merrill Lynch Management Development & Compensation
Committee, Review of Firm-wide VICP Pool and Expense (Oct. 27, 2008), at BAC-ML-NYAG
00000032).) By November, Merrill’s proposed VICP bonus pool had decreased to
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 52 of 53
approximately $3.9 billion, with an associated expense of approximately $3.2 billion. (Finnegan
Tr. at 101; Ross. Tr. at 66-67; P-Exh. 61 (memorandum from John Thain (Nov. 10, 2008), at
BAC-ML-NYAG 00000053).) Concerned that it may not have enough stock to satisfy Merrill’s
VICP stock awards, Bank of America’s management asked Merrill to pay 70 percent of the
VICP awards in cash and 30 percent in stock, instead of the 60/40 cash-stock split previously
agreed to; Merrill complied with the request, ultimately increasing the recorded current year
expense of the bonuses to approximately $3.37 billion. (Thain Tr. at 240; P-Exh. 207 (Merrill
Lynch Management Development and Compensation Committee, 2008 Final VICP Pools and
MP Recommendations, at BAC-ML-NYAG00000114).) In the weeks leading to the MDCC
December 8 meeting, executives from Bank of America consulted with Merrill about the
allocation of VICP awards for specific employees and suggested that awards for certain
employees be reduced. (Smith Tr. at 101-102; BOA’s RFA Responses Nos. 81-83.)
48. On December 8, 2008, Merrill’s MDCC met and approved a VICP bonus pool of
approximately $3.62 billion and $3.37 billion in expense. (Finnegan Tr. at 123; P-Exhs. 206
(Minutes of Regular Meeting of Management Development and Compensation Committee (Dec.
8, 2008)), at BAC-ML-NYAG00000182-183), 207 (Merrill Lynch Management Development
and Compensation Committee, 2008 Final VICP Pools and MP Recommendations (Dec. 8,
2008), at BAC-ML-NYAG00000128).) The VICP pool approved by the MDCC included
approximately $695 million in guaranteed year-end bonuses that Merrill was contractually
obligated to pay, and nearly $3 billion in discretionary awards. (Plaintiff Securities and
Exchange Commission’s Responses and Objections to Defendant Bank of America
Case 1:09-cv-06829-JSR Document 77-2 Filed 02/04/2010 Page 53 of 53
Corporation’s First Request for Admissions (Jan. 4, 2010) (“SEC’s RFA Response”) No. 206)
49. Merrill’s employees were notified of their 2008 VICP bonuses on December 19,
2008, and received the cash awards on December 31, 2008, a day before the merger with Bank of
America closed. (SEC’s RFA Responses Nos. 200-202.) Approximately 39,400 employees at
Merrill Lynch received VICP awards. (SEC’s RFA Response No. 203.) Merrill paid year-end
bonuses for 2008 of $1 million or more to nearly 700 employees, $5 million or more to over 50
employees, and $10 million or more to over 10 employees. (BOA’s RFA Responses Nos. 85-
87.) Among those who received year-end bonuses for 2008 at Merrill were employees who were
not retained after the closing of the merger. (Ross Tr. at 109, 111-112; BOA’s RFA Response
No. 92.)
50. The agreement between Bank of America and Merrill as reflected in the Schedule,
under which Merrill could pay up to $5.8 billion in VICP awards for 2008 with an expense of up
to $4.5 billion, was not publicly disclosed prior to the meeting of the shareholders of Bank of
America on December 5, 2008 to vote on the proposed merger. (BOA’s RFA Responses Nos.
40, 44.)
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