Two pension funds that agreed to a relatively small settlement with the directors of Bank of America over its acquisition of Merrill Lynch are being ordered by a federal judge to strike a better deal beginning on Monday.
The judge, P. Kevin Castel, voiced clear reservations about the $20 million settlement in a ruling on Friday, concluding that fees requested by the lawyers for the two funds could consume “some, most or all” of the money. The deal was reached last spring, months before two other pension funds in a separate lawsuit negotiated a $2.4 billion settlement with the bank over the Merrill purchase.
Lawyers representing the pension funds in the $20 million settlement — the Louisiana Municipal Police Employees’ Retirement System and the Hollywood Police Officers’ Retirement System, of Florida — last October asked the court to approve payments of as much as $13 million in legal fees, or 65 percent of the amount proposed under the settlement.
The pension funds have accused Kenneth D. Lewis, the former chief executive of Bank of America, and his fellow directors of misleading investors about Merrill’s deteriorating financial condition. Bank of America’s $50 billion purchase of Merrill Lynch was announced by Mr. Lewis in the fall of 2008 as the financial crisis was deepening, and it generated billions of dollars in losses for the bank. Those losses led to Bank of America’s second request for bailout money under the government’s Troubled Asset Relief Program.
In addition to $20 million in cash, the proposed settlement would also require Bank of America to institute corporate governance changes. Among them are an enhanced director-education program and the creation of a new board committee dedicated to oversight of major acquisitions by the company. The case was brought as a so-called derivative action, on behalf of the bank itself.
In a deposition, Mr. Lewis testified that before Bank of America stockholders voted to approve the acquisition he received loss estimates relating to Merrill that were far greater than those reflected in the merger documents filed with regulators. Shareholders rely on statements made in these filings to decide whether to approve transactions their companies have proposed; companies must disclose facts that could be meaningful for shareholders as they weigh voting on a deal.
Given these and other facts of the various litigations, the shareholders who filed the parallel case in Delaware against the bank’s directors objected to the terms of the $20 million settlement. In court filings, lawyers representing these shareholders said that representatives of the Louisiana and Florida plaintiffs had done little investigation, deposing only two of the bank’s directors, and failed to ascertain whether the board had sufficient assets to contribute to a settlement.
The lawyers in the Delaware case also argued in court that the $20 million settlement was grossly inadequate because of $500 million in directors’ and officers’ insurance purchased by Bank of America that is available to satisfy the matter. In addition, the lawyers said, the directors are not contributing personally to the settlement in spite of having the financial resources to do so. Directors are rarely held personally liable in lawsuits against companies.
In addition to these objections, the lawyers in the Delaware case noted that the $20 million is far lower than the $150 million fine paid by the bank in 2010 to resolve a lawsuit brought by the Securities and Exchange Commission over the Merrill acquisition.
Amid these arguments, Bank of America settled another class-action case in September involving the same allegations about the Merrill purchase. Under that deal, the bank agreed to pay $2.4 billion, dwarfing the amount the Louisiana and Florida plaintiffs had settled for in April. The $2.4 billion settlement was brought by lawyers representing public pension funds in Ohio and Texas. That case was also heard by Judge Castel.
Another possible sticking point in the proposed $20 million settlement is how much of the money will go to the lawyers representing the Louisiana and Florida pension funds. Last October, those lawyers asked the court to approve payments of as much as $13 million in legal fees, or 65 percent of the amount proposed under the settlement.
Late Friday, Judge Castel voiced clear reservations on the deal, writing, “The court has not yet been persuaded of the fairness, reasonableness and adequacy of a settlement of the derivative claims against defendant Lewis in exchange for corporate governance reforms of unquantifiable value and $20 million in cash, some, most or all of which may be consumed by plaintiffs’ attorneys’ fees.”
Joseph E. White III, a lawyer at Saxena White who represents the Louisiana and Florida pension funds, did not immediately return a phone call or respond to an e-mail seeking comment on Sunday.
Judge Sends Back $20 Million Settlement to Bank of America Suit
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Judge Sends Back $20 Million Settlement to Bank of America Suit
