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In re Bank of America Corp. Securities

August 27, 2010

IN RE BANK OF AMERICA CORP. SECURITIES, DERIVATIVE, AND EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA) LITIGATION


The opinion of the court was delivered by: P. Kevin Castel, District Judge

THIS DOCUMENT RELATES TO: ALL CONSOLIDATED SECURITIES AND DERIVATIVE ACTIONS

MEMORANDUM AND ORDER

Plaintiffs allege that, at the peak of the 2008 financial crisis, Bank of America Corporation ("BofA") hastily agreed to the acquisition of Merrill Lynch & Co., Inc. ("Merrill"), just as Merrill was careening toward insolvency. Plaintiffs assert that in the days and months that followed, the defendants concealed and misstated critical aspects of the transaction, specifically matters related to bonuses, staggering losses accrued in the fourth quarter of 2008, and pressure to consummate the acquisition from officials at the Federal Reserve and the Treasury Department.

This Memorandum and Order addresses six motions to dismiss directed to two different complaints. In the shareholders' direct action (the "Securities Action"), a consolidated amended class action complaint asserts that defendants violated federal securities laws, and alleges claims on behalf of all persons who purchased or acquired BofA shares between September 15, 2008 and January 21, 2009 (the "Securities Complaint," or "Sec. Compl."). Plaintiffs in the derivative action (the "Derivative Plaintiffs" and the "Derivative Action") assert, on behalf of nominal defendant BofA, claims under both the federal securities laws and state law. In addition to their derivative claims, the Derivative Plaintiffs also assert a direct claim for breach of fiduciary duty.

All Securities Defendants move to dismiss the Securities Complaint pursuant to Rules 9(b) and 12(b)(6), Fed. R. Civ. P., and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4 (the "PSLRA"). The BofA directors and the BofA officers named in the Derivative Complaint (together, the "BofA Derivative Defendants") have moved to dismiss most of the claims pursuant to Rules 9(b), 12(b)(6) and 23.1. BofA, as nominal defendant, also has filed a motion to dismiss, and joins in the arguments of the BofA Derivative Defendants. The financial advisors retained by BofA in connection with the transaction (the "Financial Advisors") separately move to dismiss the four derivative claims asserted against them.

While there are distinctions between the Securities Complaint and the Derivative Complaint, they share the same core allegations. They also share certain theories of liability under Section 14(a) and Rule 14a-9. In discussing the two complaints' assertions under Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78a, et seq., (the "'34 Act") and Rule 14a-9, the allegations of each are separately analyzed. Elsewhere, when the complaints set forth different factual assertions and theories of liability, they are specifically denoted. No allegation in either complaint is imputed to the other.

For the reasons explained below, the motions to dismiss the Securities Complaint are granted in part and denied in part. The BofA Derivative Defendants' and BofA's motions to dismiss the Derivative Complaint are granted in part and denied in part. The Financial Advisors' motion to dismiss is granted in its entirety.

BACKGROUND...................................................................................................................... 1

I. FACTUAL HISTORY............................................................................................... 1

A. Parties to the Securities Action............................................................................... 1

B. Parties to the Derivative Action.............................................................................. 3

C. Negotiations Leading up to BofA's Acquisition of Merrill.................................... 4

D. Negotiations over Merrill's Bonus Pool................................................................. 5

E. Fairness Opinion and the BofA Board's Recommendation of the Merger............. 7

F. BofA Announces Secondary Offering.................................................................... 8

G. BofA and Merrill Incur Significant Losses in the Fourth Quarter of 2008............. 9

H. Joint Proxy Did Not Disclose Merrill's Growing Fourth Quarter Losses or the Bonus Arrangement......................................................................................... 11

I. Consideration of the Invocation of the MAC Clause and the Offer of Federal Capital Support..................................................................................................... 14

J. BofA Announces Fourth Quarter Results and Federal Financial Support............ 18

K. Claims Asserted in the Securities Complaint........................................................ 19

L. Claims Asserted in the Derivative Complaint....................................................... 20

II. PROCEDURAL HISTORY..................................................................................... 21

DISCUSSION......................................................................................................................... 22

I. RULE 12(b)(6), RULE 9(b) AND THE PSLRA'S PLEADING THRESHOLD.......................................................................................................... 22

II. THAIN AND MERRILL'S MOTIONS TO DISMISS COUNT II OF THE SECURITIES COMPLAINT ARE GRANTED IN PART AND DENIED IN PART....................................................................................................................... 25

A. Thain and Merrill Had No Disclosure Duty to BofA Shareholders...................... 25

B. Thain and Merrill's Motions to Dismiss the Section 14(a) and Rule 14a-9 Claims Are Denied................................................................................................ 27

III. DEFENDANTS' MOTIONS TO DISMISS PLAINTIFFS' '34 ACT CLAIMS FOR FAILURE TO ALLEGE ACTIONABLE MISSTATEMENTS OR OMISSIONS ARE GRANTED IN PART AND DENIED IN PART..................... 29

A. Background on Section 10(b) and Rule 10b-5...................................................... 29

B. Background on Section 14(a) and Rule 14a-9...................................................... 30

C. Potential for Overlapping Damages Between the Direct and Derivative Section 14(a) Actions............................................................................................ 33

D. Derivative Plaintiffs Fail to Allege That the Individual BofA Officers Are Liable Under Section 14(a) of the '34 Act............................................................ 35

E. Motions to Dismiss for Failure to Allege Actionable Misstatements and Omissions Are Granted in Part and Denied in Part............................................... 40

1. Securities Complaint Adequately Alleges Material Misstatements Related to Merrill's Bonus Pool...................................................................................... 40

a. Qualifying Language in the Joint Proxy and Merger Agreement Did Not Disclose BofA's Consent to the Merrill Bonuses........................................... 40

b. Press Reports and Past Merrill SEC Filings Did Not Render the Joint Proxy Immaterial or Establish Truth on the Market as a Matter of Law at the Rule 12(b)(6) Stage................................................................................... 48

2. For Substantially the Same Reasons, the Derivative Complaint Adequately States a Claim under Section 14(a) and Rule 14a-9........................................... 53

3. Securities Complaint Adequately Alleges the Materiality of Defendants' Omissions Concerning Fourth Quarter 2008 Losses......................................... 54

4. For Substantially the Same Reasons, the Derivative Complaint Adequately Alleges That Section 14(a) and Rule 14a-9 Required the Disclosure of Merrill's Fourth Quarter Losses......................................................................... 60

5. Claims in the Securities and Derivative Complaints Directed to the Merger Agreement's MAC Clause Are Dismissed........................................................ 61

a. Securities Complaint Fails to Plausibly Allege That the Defendants Violated Section 10(b) and Rule 10b-5 by Failing to Disclose Developments Related to the MAC................................................................ 61

b. For Substantially the Same Reasons, the Derivative Plaintiffs' Section 14(a) Claims Arising from the Terms of the MAC Are Dismissed................ 63

c. Derivative Plaintiffs' Allegations Concerning Non-Disclosure of the Decision to Invoke the MAC Clause Fail to State a Claim under Section 14(a) or Rule 14a-9......................................................................................... 64

6. Claims Directed to the Adequacy of BofA's Due Diligence Are Dismissed.... 65

a. The Securities Complaint Fails to Plausibly Allege That the Defendants' Representations Concerning Due Diligence Violated Section 10(b) and Rule 10b-5....................................................................................................... 65

b. Similarly, the Derivative Plaintiffs Have Not Adequately Alleged That Statements in the Joint Proxy Regarding Due Diligence Violated Section 14(a) and Rule 14a-9....................................................................................... 70

7. Securities Complaint and the Derivative Complaint Both Fail to Plausibly Allege That Defendants Ran Afoul of the '34 Act's Duty to Update................ 71

a. Defendants in the Securities Complaint Had No General Duty to Update Certain Statements in Light of the October and November Losses................ 71

b. Derivative Plaintiffs' Section 14(a) and Rule 14a-9 Claims Based on Statements Regarding the Future Capital Position of BofA and Merrill Are Dismissed................................................................................................. 73

8. Motions to Dismiss the Securities Plaintiffs' Additional Section 10(b) and Rule 10b-5 Claims Are Granted in Part and Denied in Part.............................. 73

a. Statements in BofA's Press Release of January 1, 2009 Are NonActionable....................................................................................................... 74

b. Motion to Dismiss the Section 10(b) and Rule 10b-5 Claims Is Denied As to BofA's Allegedly Undisclosed Arrangement to Receive Federal Funds............................................................................................................... 74

c. Lewis's September 15 Remarks About Merrill's Liquidity Are NonActionable....................................................................................................... 77

d. Statements by Lewis Regarding Regulator Pressure and Thain's Self-Interest Are Non-Actionable........................................................................... 78

9. Derivative Plaintiffs' Remaining Section 14(a) Claims Against the BofA Directors Are Dismissed.................................................................................... 80

a. Derivative Plaintiffs Have Not Adequately Alleged That the Joint Proxy Contained Misstatements or Omissions Regarding the Overvaluation of Merrill Assets and Undervaluation of Merrill Losses..................................... 80

b. Derivative Plaintiffs Have Not Adequately Alleged That Statements about Steps Taken to Improve Merrill's Financial Condition Were Misleading....................................................................................................... 80

c. Derivative Plaintiffs Have Not Adequately Alleged That Statements Regarding Additional Government Funds to Close the Merger and the Government Guarantee Were Misleading....................................................... 82

d. Derivative Plaintiffs Have Not Alleged That the BofA Directors' Recommendation Regarding the Merger Was Subjectively False.................. 83

IV. THE MOTIONS TO DISMISS THE SECTIONS 10(b) AND 14(a) CLAIMS FOR FAILURE TO ADEQUATELY PLEAD NEGLIGENCE AND SCIENTER ARE GRANTED IN PART AND DENIED IN PART....................... 84

A. Securities Plaintiffs Must Adequately Allege Scienter for Their Section 10(b) Claims and Negligence for Their Section 14(a) Claims.............................. 84

B. Derivative Plaintiffs Also Must Adequately Allege Negligence for Their Section 14(a) Claims............................................................................................. 88

C. Securities Complaint Pleads Scienter for the Merrill Bonus Arrangement As to Lewis, Thain, BofA and Merrill, and Negligence As to the BofA Directors................................................................................................................ 89

D. Derivative Complaint Adequately Pleads Negligence on the Part of the BofA Directors Regarding the Merrill Bonuses.................................................... 92

E. Securities Complaint Fails to Allege Scienter As to Merrill's Fourth-Quarter Losses, but Both the Securities Complaint and the Derivative Complaint Adequately Allege Negligence............................................................................. 94

1. Securities Complaint Does Not Satisfy the PSLRA and Rule 9(b) in Its Scienter Allegations Regarding the Fourth Quarter Losses............................... 94

2. Securities Complaint Adequately Alleges Negligence As to the Losses, and Its Section 14(a) and Rule 14a-9 Claims Survive....................................... 95

3. Derivative Complaint Adequately Alleges Negligence As to Merrill's Fourth Quarter Losses........................................................................................ 96

F. Securities Complaint Does Not Allege Scienter for the Failure to Disclose Federal Financial Support for the Transaction...................................................... 97

V. DERIVATIVE PLAINTIFFS HAVE ADEQUATELY ALLEGED LOSS CAUSATION FOR THEIR SECTION 14(a) CLAIMS AGAINST THE BOFA DIRECTORS AND DEMAND IS EXCUSED FOR THOSE CLAIMS..... 99

A. Derivative Plaintiffs Have Adequately Alleged Loss Causation for Their Section 14(a) Claims Against the BofA Directors................................................ 99

B. Demand Is Excused for the Derivative Plaintiffs' Section 14(a) Claims Against the BofA Directors................................................................................. 101

VI. DERIVATIVE COMPLAINT FAILS TO STATE A SECTION 14(a) CLAIM AGAINST THE FINANCIAL ADVISORS.......................................................... 105

VII. SECURITIES DEFENDANTS' MOTION TO DISMISS THE SECTION 20(a) CLAIM IS DENIED..................................................................................... 106

VIII. SECURITIES DEFENDANTS' MOTION TO DISMISS THE SECURITIES PLAINTIFFS' '33 ACT CLAIMS IS GRANTED IN PART AND DENIED IN PART................................................................................................................ 106

IX. MOTIONS TO DISMISS THE DERIVATIVE PLAINTIFFS' STATE LAW CLAIMS ARE GRANTED IN PART AND DENIED IN PART......................... 110

A. Derivative Plaintiffs Have Abandoned Their Aiding and Abetting a Breach of Fiduciary Duty Claim..................................................................................... 110

B. Motion to Dismiss the Derivative Breach of Fiduciary Duty Claims Against the BofA Officers and Directors Is Granted....................................................... 110

1. Demand Is Not Excused for the Breach of Fiduciary Duty Claims Arising from the Merger Approval Because the Derivative Plaintiffs Have Failed to Raise a Reasonable Doubt That the Board Acted Disloyally or in Bad Faith When It Approved the Merger................................................................ 111

a. BofA Directors Were Disinterested and Independent When They Approved the Merger.................................................................................... 111

b. Derivative Complaint Fails to Plead That the BofA Directors Acted Disloyally or in Bad Faith When They Approved the Merger...................... 114

2. Alternatively, Plaintiffs Have Failed to State a Claim Against the BofA Derivative Defendants for Breach of Fiduciary Duty Arising from the Time Prior to and Including the Board's Approval of the Merger.................. 116

3. BofA Officers' Motion to Dismiss the Claims Based on Post-Approval Breaches of Fiduciary Duty is Granted............................................................ 118

a. Derivative Plaintiffs Have Not Adequately Alleged That the BofA Officers Breached the Duty of Disclosure.................................................... 119

b. Alleged Decision to Retract the Invocation of the MAC Clause.................. 122

C. Derivative Plaintiffs Have Failed to State a Claim for Unjust Enrichment........ 123

D. Derivative Plaintiffs Have Failed to State a Claim for Contribution.................. 125

E. Demand Is Not Excused for the Derivative Plaintiffs' Breach of Fiduciary Duty and Professional Negligence Claims Against the Financial Advisors....... 126

F. Derivative Plaintiffs Fail to State a Direct Claim Against the BofA Directors and Officers for Breach of Fiduciary Duty......................................................... 127

G. This Action Will Not Be Stayed or Dismissed in Favor of the Delaware Action.................................................................................................................. 129

H. Derivative Plaintiffs May File a Motion Requesting Leave to Amend.............. 131

X. LETTERS OF FEBRUARY 2010 PLAY NO PART IN THE CONSIDERATION OF THESE MOTIONS........................................................ 131

CONCLUSION..................................................................................................................... 132

BACKGROUND

I. FACTUAL HISTORY

For the purposes of the defendants' motions, all nonconclusory factual allegations are accepted as true. S. Cherry St. LLC v. Hennessee Group LLC, 573 F.3d 98, 100 (2d Cir. 2009); see also Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949-50 (2009). As the nonmovants, all reasonable inferences are drawn in favor of the plaintiffs. United States v. City of New York, 359 F.3d 83, 91 (2d Cir. 2004).

A. Parties to the Securities Action

BofA is a Delaware corporation with its headquarters in North Carolina. (Sec. Compl. ¶ 33.) It provides banking and non-banking financial services in the United States and internationally. (Sec. Compl. ¶ 33.) Its shares are traded on the New York Stock Exchange ("NYSE"). (Sec. Compl. ¶ 33.) As of April 30, 2009, it had more than 6.4 billion shares of common stock outstanding. (Sec. Compl. ¶ 33.) Merrill is a financial services company incorporated in Delaware with its headquarters in New York. (Sec. Compl. ¶ 34.) It provides investment banking, research and wealth management services. (Sec. Compl. ¶ 34.) From the start of the class period through its acquisition by BofA on December 31, 2008, Merrill's shares traded on the NYSE. (Sec. Compl. ¶ 34.)

On January 1, 2009, BofA closed the acquisition of Merrill, which then became a direct subsidiary of BofA. (Sec. Compl. ¶ 34.) The acquisition was structured as a stock-for-stock transaction in which Merrill shareholders swapped each Merrill share in exchange for 0.8595 of a share of BofA's common stock. (Joint Proxy Cover Letter.) In order to consummate the transaction, BofA issued approximately 1.71 billion shares of common stock and 359,100 shares of preferred stock. (Joint Proxy Cover Letter.) BofA needed shareholder approval in order to issue the shares, which required, among other things, amendment to its certificate of incorporation. (Joint Proxy, Notice of Special Meeting.) BofA and Merrill often describe the transaction as a "merger," although it was not a merger in the true sense, and was instead a stock-for-stock acquisition of Merrill by BofA. Because the transactional documents and disclosures characterize the acquisition as a "merger," the Court will occasionally employ the parties' preferred terminology.

Defendant Kenneth Lewis was BofA's CEO, president, and chairman of the board of directors during the class period. (Sec. Compl. ¶ 35.) Lewis signed the Agreement and Plan of Merger (the "Merger Agreement") governing the acquisition. (Sec. Compl. ¶ 35.) Lewis also signed the transmittal letter for BofA and Merrill's definitive joint proxy statement (the "Joint Proxy"), which was dated October 31, 2008 and filed with the SEC on November 3, 2008. (Sec. Compl. ¶ 35.)

Defendant Joe L. Price was BofA's CFO. (Sec. Compl. ¶ 36.) Defendant Neil A. Cotty was BofA's Chief Accounting Officer prior to the announcement of the acquisition; after the acquisition's announcement, he was appointed Merrill's interim CFO and functioned as a liaison between BofA and Merrill. (Sec. Compl. ¶ 37.) Defendant John A. Thain was CEO and chairman of the board of Merrill from the beginning of the class period through December 31, 2008. (Sec. Compl. ¶ 38.) From January 1, 2009 through the end of the class period, Thain was president of global banking, securities and wealth management at BofA. (Sec. Compl. ¶ 38.)

In addition to their claims against senior management of the two companies, the Securities Plaintiffs also bring claims against fifteen members of BofA's board of directors.*fn1 (Sec. Compl. ¶¶ 39-53.) They assert claims under the Securities Act of 1933, 15 U.S.C. § 77a, et seq. (the "'33 Act") against the underwriters of a secondary offering of BofA shares in October 2008. (Sec. Compl. ¶¶ 362-395.) Those two underwriter defendants are Banc of America Securities LLC ("Banc of America"), which is a wholly-owned subsidiary of BofA, and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPFS"). (Sec. Compl. ¶¶ 56-58.)

The lead plaintiffs are public pension funds that owned shares of BofA common stock during the class period. (Sec. Compl. ¶¶ 27-31.) Two of the lead plaintiffs, the State Teachers Retirement System of Ohio and the Ohio Public Employees Retirement System, purchased shares of BofA common stock as part of the company's secondary offering in October 2008, which forms the basis of the Complaint's '33 Act claims. (Sec. Compl. ¶¶ 27-28.)

B. Parties to the Derivative Action

The Derivative Plaintiffs assert claims against all sixteen individuals who were BofA directors at the time of the Merrill acquisition, including Lewis (the "BofA Directors"). (Deriv. Compl. ¶¶ 43-58.) Other than defendant Lewis, who was also BofA's Chairman and CEO during all relevant times, none of the directors were officers or employees of BofA. (Deriv. Compl. ¶¶ 43-58.)

In addition to Lewis, the Derivative Plaintiffs bring claims against a number of BofA officers, including Price, Cotty, BofA Vice Chairman for Corporate Planning and Strategy Gregory Curl, Chief Administrative Officer J. Steele Alphin, Global Risk Executive Amy Woods Brinkley, Brian T. Moynihan, head of Global Banking and Global Wealth and Investment Management and after December 10, 2008, General Counsel, Keith T. Banks, President of BofA's Global Wealth and Investment Management unit, Timothy Mayopoulos, General Counsel until December 10, 2008, and Associate General Counsel Teresa Brenner (the "BofA Officers"). (Deriv. Compl. ¶¶ 59-67.)

Louisiana Municipal Police Employees Retirement System and Hollywood Police Officers' Retirement System are the interim lead plaintiffs in the Derivative Action. (MDL Docket # 2.) They are citizens of Louisiana and Florida, respectively. (Deriv. Compl. ¶¶ 40-41.) None of the BofA Officers or Directors is a citizen of Louisiana or Florida. (Deriv. Compl. ¶¶ 43-67.)

The Derivative Plaintiffs assert claims against the Financial Advisors, J.C. Flowers & Co. LLC ("J.C. Flowers") and Fox-Pitt Kelton Cochran Caronia Waller (USA) LLC ("FPK"). Each of the Financial Advisors provided the BofA board with an opinion that the consideration BofA paid for Merrill was fair, from a financial point of view, to BofA. (Deriv. Compl. ¶¶ 83-84.) According to the Derivative Complaint, J.C. Flowers and FPK are limited liability companies "organized and existing under the laws of the State of Delaware," with their "principal place of business" in New York. (Id.)

C. Negotiations Leading up to BofA's Acquisition of Merrill

On the morning of Saturday, September 13, 2008, Thain reached out to Lewis. (Sec. Compl. ¶ 4.) At that time, Thain was CEO of Merrill, and Lewis was CEO of BofA. (Sec. Compl. ¶ 4; Deriv. Compl. ¶ 9.) Thain believed that Lehman Brothers Holdings, Inc. ("Lehman Brothers") would soon file for bankruptcy, resulting in market turmoil that "would cause severe liquidity issues" for Merrill, beginning as early as the following Monday. (Sec. Compl. ¶ 4; Deriv. Compl. ¶ 98.) Thain believed that a Lehman Brothers bankruptcy would trigger Merrill's own "catastrophic" collapse and "likely render [Merrill] effectively insolvent" on Monday. (Sec. Compl. ¶ 62; Deriv. Compl. ¶ 98.)

According to the Securities Complaint, Lewis "had long coveted" Merrill, and stated as much in press interviews. (Sec. Compl. ¶¶ 5, 59.) Thain was aware of Lewis's interest, but previously rebuffed BofA's offers. (Sec. Compl. ¶ 63.) On Saturday morning, Lewis flew to New York, where he met Thain at 2:30 p.m. (Sec. Compl. ¶ 64; Deriv. Compl. ¶ 100.) Thain proposed selling a 9.9 percent stake of Merrill to BofA. (Sec. Compl. ¶ 64; Deriv. Compl. ¶ 100.) Lewis later recalled, "I responded to John, 'That's not really what I have envisioned here. I want to buy the whole company, not invest 9 to 10 percent.'" (Sec. Compl. ¶ 64.) The two eventually agreed that any transaction would entail BofA acquiring Merrill in full, and "later that same day, teams from both firms began conducting due diligence and negotiating the terms of a possible merger." (Deriv. Compl. ¶ 100.)

D. Negotiations over Merrill's Bonus Pool

As talks unfolded over the weekend, bonuses to Merrill employees became a major topic of negotiation. (Sec. Compl. ¶¶ 6, 67; Deriv. Compl. ¶ 101.) According to the Securities Complaint, Thain later stated that, alongside the acquisition price and the language of the Material Adverse Change clause (the "MAC"), the employee bonus arrangement was one of the three principal topics of negotiation. (Sec. Compl. ¶ 67.) The Derivative Complaint asserts that certain BofA officers involved in the negotiations later testified that "Merrill's ability to pay year-end bonuses to its executives and employees pursuant to its" incentive compensation program was a major topic of negotiation. (Deriv. Compl. ¶ 101.)

The Securities Plaintiffs allege that Thain remained informed of the negotiations' progress through Greg Fleming, Merrill's president and chief operating officer. (Sec. Compl. ¶ 67.) Merrill wanted to pay its officers and employees $5.8 billion in bonuses. (Sec. Compl. ¶ 68; Deriv. Compl. ¶ 10.) This included bonuses for executive officers that ranged from $15 million to $40 million. (Sec. Compl. ¶ 68.) The Securities Complaint states that the $5.8 billion bonus pool totaled 12 percent of the transaction's value and 26 percent more than BofA's earnings in the first two quarters of 2008. (Sec. Compl. ¶ 72.) "It also represented 77% of Merrill's record earnings of $7.5 billion for all of 2006; nearly 30% of Merrill's total stockholders' equity as of December 26, 2008; and over 8% of Merrill's total cash as of December 26, 2008." (Sec. Compl. ¶ 72.)

Merrill wanted to pay bonuses on an accelerated basis and prior to the transaction's closing, even though its past practice had been to pay bonuses after the close of the fiscal year. (Sec. Compl. ¶¶ 69-70, 74; Deriv. Compl. ¶¶ 10, 215.) The Securities Complaint asserts that the accelerated payment schedule prevented BofA from later reducing bonus payments, permitted Merrill officers "to reap gigantic bonuses" despite dismal financial results in 2008 and ultimately reduced the value of Merrill before BofA finalized the acquisition. (Sec. Compl. ¶¶ 75-77.) As characterized in the Securities Complaint, negotiations over the bonuses "dragged on for hours," and "delay[ed]" execution of the Merger Agreement until 2 a.m. on Monday, September 15, 2008 -- one hour after Lehman Brothers filed for bankruptcy. (Sec. Compl. ¶ 71.) In press interviews, Lewis later indicated that the bonus negotiations were a source of hard feelings, and characterized the issue as "petty" and "selfish." (Sec. Compl. ¶ 78.)

The Derivative Complaint alleges that a term sheet prepared on Sunday, September 14 reflected that as a result of the negotiations, BofA "had agreed in principle that Merrill would be authorized to pay a bonus pool that would, at most, be 'flat to last year'... with a maximum recorded expense of $4.5 billion." (Deriv. Compl. ¶ 120.) BofA and Merrill also agreed that Merrill's year-end bonuses would be paid in a 60/40 cash/stock split, the same as in 2007, and that "bonus allocations would be made in consultation with BofA." (Deriv. Compl. ¶ 121.) Taking "headcount changes" into account, the parties agreed that the bonus pool would be $5.8 billion, which was greater than the pool that Merrill previously projected for 2008. (Deriv. Compl. ¶ 122.)*fn2 BofA also agreed to allow Merrill to accelerate its incentive bonus payments to December 31, 2008, prior to the closing of the transaction, and "ahead of the disclosure date for Merrill's fourth-quarter results." (Deriv. Compl. ¶ 123.)

E. Fairness Opinion and the BofA Board's Recommendation of the Merger

The principal terms of the transaction were negotiated in approximately 24 hours, from late-afternoon on Saturday, September 13, to late-afternoon on Sunday, September 14, 2008. (Deriv. Compl. ¶ 101.) On Sunday, Lewis agreed that BofA would buy Merrill for $50 billion, valuing Merrill stock at $29 per share, which was a 70 percent premium over Merrill's $17 NYSE closing price the day before. (Sec. Compl. ¶ 66.; Deriv. Compl. ¶ 102.)

According to the Joint Proxy, late on Sunday afternoon, the BofA Directors met with BofA "senior management and its outside advisors." (Joint Proxy at 50.) At that meeting, BofA's senior management and the Financial Advisors discussed the results of their due diligence exercise. (Joint Proxy at 55.) J.C. Flowers and FPK each delivered an oral opinion that the exchange ratio of 0.8595 of a share of BofA for every share of Merrill "was fair, from a financial point of view, to [BofA]." (Joint Proxy at 51.) The Joint Proxy would later set forth the full text of the Financial Advisors' written fairness opinions. The FPK fairness opinion stated that FPK was "of the opinion that, as of the date hereof, the Exchange Ratio to be paid by [BofA] in the Merger is fair, from a financial point of view, to [BofA]." (Joint Proxy at D-3.) The J.C. Flowers opinion stated: "we are of the opinion that as of the date hereof the Exchange Ratio is fair, from a financial point of view, to [BofA]." (Joint Proxy at C-2.) The actions of the Financial Advisors are material to the Derivative Complaint. They are not named as defendants in the Securities Complaint.

BofA's general counsel defendant Mayopoulos and BofA's outside counsel Wachtell, Lipton, Rosen & Katz LLP ("Wachtell") then advised the board regarding "the legal standards applicable to its decisions and actions with respect to the proposed transaction and reviewed the legal terms of the proposed merger." (Joint Proxy at 51.) The BofA Board then unanimously voted to approve the transaction. (Joint Proxy at 51.) The two companies signed the Merger Agreement in the early morning of Monday, September 15. (Joint Proxy at 51.) Lewis signed on behalf of BofA, and Thain signed on behalf of Merrill. (Joint Proxy at A-46.)

F. BofA Announces Secondary Offering

On October 7, 2008, BofA conducted a secondary offering of common stock, in which it sold 455,000,000 shares at $22 per share, netting proceeds of $9.9 billion (the "Secondary Offering"). (Sec. Compl. ¶ 83.) The Secondary Offering is the basis of claims arising under the '33 Act. (Sec. Compl. ¶¶ 362-395.) According to the plaintiffs, the offering documents expressly incorporated the Merger Agreement and the Form 8-K filing announcing the acquisition; because the documents are alleged to be materially false and misleading, plaintiffs allege that statements made relating to the secondary offering were materially false and misleading. (Sec. Compl. ¶ 201.)

G. BofA and Merrill Incur Significant Losses in the Fourth Quarter of 2008

In October and November 2008, while shareholder approval of the transaction was pending, Merrill incurred significant losses. (Sec. Compl. ¶¶ 7, 87; Deriv. Compl. ¶ 168.) In October 2008, Merrill lost approximately $7 billion. (Sec. Compl. ¶ 88; Deriv. Compl. ¶ 20.) Its total losses for October and November exceeded $15 billion. (Sec. Compl. ¶ 90; Deriv. Compl. ¶ 20.) In November, Merrill also took an impairment charge of approximately $2 billion to the value of its goodwill. (Sec. Compl. ¶ 91; Deriv. Compl. ¶ 20.) According to the Securities Complaint, Merrill's losses were substantial, particularly when contrasted with the $5.8 billion that BofA earned in the first nine months of 2008. (Sec. Compl. ¶ 92.)

According to the Securities Complaint, defendants Lewis, Thain, Price and Cotty were aware of Merrill's losses as they occurred. (Sec. Compl. ¶ 93.) BofA assigned 200 employees to monitor Merrill's financial condition. (Sec. Compl. ¶ 93; Deriv. Compl. ¶ 170.) Thain later stated that BofA received frequent updates on Merrill's financial condition. (Sec. Compl. ¶¶ 93-95.) In press reports, BofA also stated that it was "kept informed of the financial condition" of Merrill. (Sec. Compl. ¶ 96.) Lewis later acknowledged that he was aware of Merrill's deteriorating financial condition as it occurred in real time. (Sec. Compl. ¶¶ 97-98.) Lewis led weekly calls with the BofA board of directors, which included discussion of Merrill's fourth quarter losses. (Sec. Compl. ¶ 99.)

According to the Derivative Plaintiffs, the BofA Derivative Defendants "had complete and unfettered access to Merrill's financial and accounting records beginning no later than September 15, 2008." (Deriv. Compl. ¶ 162.) This included access to Merrill's profit and loss reports, "which showed the facts of Merrill's deteriorating positions." (Deriv. Compl. ¶ 164.) In addition, "Lewis, Price and other senior executives among the BofA [Derivative] Defendants received weekly reports concerning Merrill's financial condition beginning immediately after the Merger Agreement was executed." (Deriv. Compl. ¶ 165 (emphasis added).)

According to the Securities Complaint, Merrill's fourth-quarter losses were so significant that BofA management discussed terminating the transaction "on several occasions." (Sec. Compl. ¶ 100.) Shortly before Thanksgiving, BofA executives began to discuss invoking the MAC. (Sec. Compl. ¶¶ 100-01.) The magnitude of Merrill's losses was not disclosed to BofA's shareholders. (Sec. Compl. ¶ 101.) Within BofA, internal disagreements broke out as to whether shareholders should be informed of the Merrill losses in advance of the proxy vote. (Sec. Compl. ¶ 102.)

Meanwhile, BofA's own losses were growing, making it more difficult to absorb Merrill's. (Sec. Compl. ¶ 103.) BofA was projecting a first-ever quarterly loss of $1.4 billion. (Sec. Compl. ¶ 103.) BofA executives told the Federal Reserve that BofA, excluding the Merrill acquisition, was "very thinly capitalized...." (Sec. Compl. ¶ 103.)

According to the Derivative Plaintiffs, at some point in November, Merrill's losses became "so severe" that defendant Price sought the advice of Mayopoulos and Wachtell "as to whether BofA should disclose Merrill's expected fourth quarter losses to BofA shareholders." (Deriv. Compl. ¶ 167.) After receiving legal advice, BofA decided not to disclose the losses. (Deriv. Compl. ¶ 167.) According to the Derivative Complaint, the BofA Directors "conducted weekly conference calls every Friday starting in September 2008 and continuing through December 2008, [and] could not and should not have been unaware of Merrill's accelerating losses throughout the fourth quarter." (Deriv. Compl. ¶ 170.)

The Derivative Plaintiffs allege that Lewis "was aware or should have been aware" of a projected $9 billion fourth-quarter loss at Merrill, "no later than the evening of December 3, 2008, when he received the latest weekly BofA internal report on Merrill." (Deriv. Compl. ¶ 172 (emphasis omitted).) Plaintiffs allege that "on this occasion" Craig Rosato, BofA's Chief Accounting Officer sent an email to Lewis, which reported that Merrill's fourth quarter revenues would need a downward adjustment of $3 billion. (Deriv. Compl. ¶ 172.) This brought Merrill's fourth quarter loss to $9 billion. (Deriv. Compl. ¶ 172.) The "December 5, 200[8], projection was shared with the BofA Board no later than at its meeting on December 9, 2008." (Deriv. Compl. ¶ 172.) By December 14, 2008, Merrill's projected loss had grown to $12 billion. (Deriv. Compl. ¶ 174.)

H. Joint Proxy Did Not Disclose Merrill's Growing Fourth Quarter Losses or the Bonus Arrangement

Following the announcement of the transaction on September 15, 2008, BofA, Merrill and their respective legal counsel "prepared the transactional and disclosure documents relating to the Merger." (Deriv. Compl. ¶ 126.) BofA was represented by Wachtell, and Merrill was represented by Shearman & Sterling, LLP ("Shearman"). (Deriv. Compl. ¶ 126.) The agreement regarding bonuses "was memorialized by Wachtell and Shearman" in section 5.2 of a disclosure schedule attached to the Merger Agreement (the "Disclosure Schedule"). (Deriv. Compl. ¶ 127.) According to information provided to the SEC by several individuals, including Lewis, "lawyers at Wachtell and Shearman, and one or more of BofA's in-house lawyers, including Defendant Mayopolous [sic]... and Defendant Brenner," decided to place this information in the Disclosure Schedule, instead of the Merger Agreement. (Deriv. Compl. ¶ 129, 130.) This Disclosure Schedule, which was not available to shareholders prior to voting on the transaction, provided that incentive bonuses for 2008 "may be awarded at levels that (i) do not exceed $5.8 billion in aggregate value (inclusive of cash bonuses and the grant date of long-term incentive awards)... and (ii) do not result in 2008 [incentive-related] expense exceeding $4.5 billion." (Deriv. Compl. ¶ 128 (quoting Disclosure Schedule).)

The terms of the merger were set forth in a definitive Joint Proxy filed with the SEC and mailed to shareholders of record on November 3, 2008. (Sec. Compl. ¶ 205; Deriv. Compl. ¶ 125.) In the Joint Proxy, the BofA Directors solicited proxies to vote on the merger at a special meeting on December 5, 2008. (Deriv. Compl. ¶ 125.)

The Joint Proxy explains to shareholders the terms and conditions of, and the basis for the boards' recommendations for, the acquisition. (Sec. Compl. ¶ 206; Deriv. Compl. ¶¶ 107-08, 125, 155.) The Joint Proxy begins with a letter to shareholders of BofA and Merrill, which features as its heading the separate corporate logos of the two companies. (Joint Proxy Cover Letter.) The letter is signed by both Lewis and Thain. (Joint Proxy Cover Letter.) Among other things, the letter states that the BofA board unanimously recommended the proposal to issue the shares necessary to purchase Merrill. (Joint Proxy Cover Letter.) By the Court's count, the Joint Proxy incorporates by reference 78 separate SEC filings of either BofA or Merrill. (Joint Proxy at 123-24.)

The Joint Proxy also attaches a copy of the Merger Agreement. It describes the Merger Agreement as "subject to important qualifications and limitations agreed to between the parties," which "may have been included in the agreement for the purpose of allocating risk between the parties rather than to establish matters as facts." (Joint Proxy at 125.) It asserted that certain "materials" are intended "only to provide you with information regarding the terms and conditions of the agreements, and not to provide any other factual information...." (Joint Proxy at 125.) The Joint Proxy advised that provisions of the Merger Agreement "should not be read alone," but rather, in conjunction with the Joint Proxy and filings incorporated by reference. (Joint Proxy at 125.) Elsewhere, the Joint Proxy stated, "We urge you to read the merger agreement carefully and in its entirety, as it is the legal document governing the merger." (Joint Proxy at 76.)

The Joint Proxy did not disclose the losses of Merrill or BofA in the fourth quarter of 2008, or disclose that bonuses were to be paid to Merrill personnel prior to the transaction's closing. (Sec. Compl. ¶¶ 106, 207; Deriv. Compl. ¶¶ 232(g)-(j), 233(a).) According to both complaints, the Joint Proxy falsely stated that there had been an "absence of material adverse changes" to Merrill's financial conditions. (Sec. Compl. ¶ 107; Deriv. Compl. ¶ 233(b).) Both complaints assert that the Joint Proxy's incorporation by reference of a March 2008 proxy statement issued by Merrill adopted that proxy's representation that Merrill would not pay discretionary bonuses prior to January. (Sec. Compl. ¶ 108; Deriv. Compl. ¶ 232(j).) All plaintiffs contend that the Joint Proxy's representations as to the Merrill bonuses were false and misleading because Merrill had negotiated with BofA to pay up to $5.8 billion in bonuses and to make those payments earlier than in prior years, on a timeline prior to the transaction's closing. (Sec. Compl. ¶¶ 214-20; Deriv. Compl. ¶¶ 232(g)-(j).)

BofA filed proxy supplements on November 21, and November 26, 2008. (Sec. Compl. ¶ 221; Deriv. Compl. ¶ 239.) In the second proxy supplement Lewis stated that "Bank of America is positioned to ride out this severe economic storm." (Sec. Compl. ¶ 222; Deriv. Compl. ¶ 239.) Lewis also made statements about BofA's capital and liquidity positions, and stated that, although BofA had received a capital injection from the federal government, "th[ose] were funds that [BofA] did not need and did not seek." (Sec. Compl. ¶ 222; Deriv. Compl. ¶ 239.) By the beginning of December 2008, Merrill had incurred approximately $15.3 billion in losses, including its $2 billion impairment charge taken to the value of corporate goodwill. (Sec. Compl. ¶ 209; Deriv. Compl. ¶¶ 20, 240.)

All plaintiffs allege that the failure to disclose Merrill's losses rendered statements in the Joint Proxy false and misleading. (Sec. Compl. ¶ 211; Deriv. Compl. ¶ 233(a).) According to plaintiffs, Merrill's losses in the fourth quarter amounted to material adverse changes to its financial condition, as was evidenced by BofA's deliberations about invoking the MAC provision of the Merger Agreement. (Sec. Compl. ¶ 211; Deriv. Compl. ¶¶ 233(b) & (c).) As noted, the Joint Proxy represented that no material adverse change had occurred in Merrill's financial condition. (Sec. Compl. ¶ 212; Deriv. Compl. ¶ 233(b).)

I. Consideration of the Invocation of the MAC Clause and the Offer of Federal Capital Support

Shareholders of BofA and Merrill voted to approve the transaction on December 5, 2008. (Sec. Compl. ¶¶ 112, 225; Deriv. Compl. ¶¶ 1, 176.) On December 9, defendants Lewis and Price met with BofA's board of directors to discuss Merrill's financial condition. (Sec. Compl. ¶ 113.) According to the Securities Complaint, Price estimated that Merrill would lose $9 billion after taxes, and described the scope of loss as "quite significant." (Sec. Compl. ¶ 113.) The Derivative Complaint alleges that by December 5, 2008, Lewis was aware of a revised projection that Merrill would incur a $9 billion after-tax loss for the fourth quarter. (Deriv. Compl. ¶ 172.)

In light of the accumulating losses, Lewis considered exercising BofA's right to terminate the transaction prior to the closing, as the MAC provision contemplated. (Sec. Compl. ¶ 113; Deriv. Compl. ¶¶ 181, 183.) He called Treasury Secretary Paulson on December 17, 2008. (Sec. Compl. ¶ 114; Deriv. Compl. ¶ 185.) Lewis told Paulson that BofA was "strongly considering" invoking the MAC and terminating the acquisition. (Sec. Compl. ¶ 114; Deriv. Compl. ¶ 185.)

At Paulson's instruction, Lewis traveled to Washington, D.C. for a face-to-face meeting at the Federal Reserve. (Sec. Compl. ¶ 114; Deriv. Compl. ¶ 186.) Attendees included Paulson and Ben Bernanke, the chairman of the Federal Reserve Board (the "Fed"). (Sec. Compl. ¶ 115; Deriv. Compl. ¶ 186.) Lewis stated that BofA was facing its first-ever quarterly loss, and that Merrill's losses were so large that they threatened BofA's solvency. (Sec. Compl. ¶ 115.) Lewis said that BofA intended to invoke the MAC, stating that BofA learned of the losses only in mid-December. (Sec. Compl. ¶ 115.) Bernanke and Paulson urged Lewis not to invoke the MAC. (Sec. Compl. ¶ 116; Deriv. Compl. ¶ 186.)

According to the Securities Complaint, Lewis then requested "a taxpayer bailout," including a $50 billion guarantee of assets, as a condition to proceeding with the transaction. (Sec. Compl. ¶ 116.) He agreed to provide the Fed with information about the companies' fourth-quarter performances and risk exposures. (Sec. Compl. ¶ 116.) After reviewing the materials, Fed officials concluded that Lewis's claim of surprise at Merrill's losses was not credible. (Sec. Compl. ¶ 117; Deriv. Compl. ¶ 115.)

On December 19, Lewis and Price again spoke to Paulson and Bernanke, stating that Merrill's pre-tax losses exceeded $21 billion, and that the MAC would be invoked. (Sec. Compl. ¶ 124.) Lewis indicated that the deal would proceed only if the federal government agreed to purchase Merrill's toxic assets, or else guaranteed BofA against any losses arising from them. (Sec. Compl. ¶ 124.) Officials countered that invoking the MAC would raise questions from the public about BofA's diligence, financial condition and management. (Sec. Compl. ¶ 125.)

According to the Derivative Complaint, on December 21, the "BofA Board determined that going through with the Merger would jeopardize BofA's existence as a going concern and that -- despite the urgings of Fed officials -- it was in [BofA's] best interests to invoke the MAC clause and terminate the Merger." (Deriv. Compl. ¶ 188 (emphasis added).) When Lewis informed Secretary Paulson of this decision, Paulson told Lewis that if BofA invoked the MAC clause, Paulson would remove BofA's directors and management from their positions. (Sec. Compl. ¶ 126; Deriv. Compl. ¶ 188.)

The Derivative Complaint alleges that Lewis called a board meeting for 4:00 p.m. of the next day, December 22, 2008. (Deriv. Compl. ¶ 191.) Throughout the evening of December 21, 2008, according to the Derivative Complaint, Lewis "canvassed fellow Board members informally to determine whether the Board would opt to preserve their jobs and support management's recommendation not to invoke the MAC.... " (Deriv. Compl. ¶ 193.) All of the directors, except Patricia Mitchell and Jackie Ward attended the meeting. (Deriv. Compl. ¶ 196.) At that meeting, the board agreed not to invoke the MAC clause. (Deriv. Compl. ¶ 196.) Lewis subsequently informed Paulson and Bernanke that BofA would go forward with the acquisition. (Sec. Compl. ¶¶ 127-28; Deriv. Compl. ¶ 197.)

Lewis feared that consummation of the transaction could subject BofA to shareholder suits. (Sec. Compl. ¶ 129; Deriv. Compl. ¶ 199.) He approached Fed officials to request measures to shield BofA from potential liability. (Sec. Compl. ¶¶ 129-31; Deriv. Compl. ¶ 199.) Bernanke and Fed General Counsel Scott Alvarez discussed BofA's potential shareholder liability in completing the acquisition. (Sec. Compl. ¶¶ 129-31; Deriv. Compl. ¶¶ 199-200.) Partly acting under Alvarez's advice, Bernanke declined to take any actions that would limit BofA's liability. (Sec. Compl. ¶¶ 129-31.)

BofA did, however, receive a $138 billion "taxpayer bailout," which consisted of a $20 billion capital infusion and a $118 billion guarantee against losses on certain risky assets, mainly those acquired from Merrill. (Sec. Compl. ¶ 132; Deriv. Compl. ¶ 21.) According to the Securities Complaint, Lewis told the BofA board that "the verbal commitment of the Fed and Treasury" was material to management's recommendation to close on the acquisition. (Sec. Compl. ¶ 133.) As characterized in the Securities Complaint, "Lewis concealed the bailout from investors." (Sec. Compl. ¶ 134.) He told the BofA board that the Company would not enter into a written agreement concerning federal funds, because he could not risk public disclosure of government loans prior to closing of the transaction. (Sec. Compl. ¶¶ 134, 136; Deriv. Compl. ¶¶ 197-98, 201.) ...


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