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Fortune (as published by, April 23, 2009 article



Pressure builds on BofA's Ken Lewis

Blaming Hank Paulson for being forced to keep details about the Merrill deal secret won't help the Bank of America CEO in a struggle with shareholders.

Colin Barr, senior writer

Last Updated: April 23, 2009: 9:42 PM ET




Ken Lewis will face a potentially contentious shareholder meeting next week.

NEW YORK (Fortune) -- Questions about whether Bank of America breached its duties to shareholders come at an inconvenient time for embattled CEO Ken Lewis.

According to documents released Thursday by a top state prosecutor, the BofA (BAC, Fortune 500) chief met repeatedly late last year with federal regulators and the bank's board to discuss the deteriorating condition of Merrill Lynch, the struggling brokerage BofA had agreed to acquire in September.

At one point, according to an account released by New York Attorney General Andrew Cuomo, Lewis told then-Treasury Secretary Henry Paulson that BofA was considering backing out of the Merrill deal -- only to relent when Paulson said regulators, fearing a financial sector collapse, might respond by removing Lewis and his directors.

The Cuomo report certainly won't go down as a shining moment for a government that has twisted itself in knots claiming it wasn't pulling the strings at financial firms it invested in.

But worse, to some observers, is BofA's failure to disclose any of this information to its shareholders -- regardless of Lewis's claim he was being leaned on by Paulson.

The report could increase the pressure on Lewis as he and some members of the BofA board face re-election next week at the company's annual shareholder meeting.

"It's hard for me to believe the Treasury and the Federal Reserve would tell Ken Lewis to violate securities laws," said Jonathan Finger, a longtime BofA investor who has been critical of Lewis' penchant for empire building at shareholder expense. "Regardless of the pressure he may have felt, Ken Lewis still had a duty to protect shareholders and disclose relevant information."

Cuomo wrote in a letter to congressional leaders and other top federal officials Thursday that facts unearthed in his investigation raise questions about "corporate governance and disclosure practices at Bank of America."

BofA dismisses questions about its handling of the deal.

"We believe we acted legally and appropriately in the Merrill Lynch transaction," spokesman Scott Silvestri said.

But some observers aren't bowled over by Lewis' claim that he was strong-armed by regulators.

Neil Barofsky, the special inspector general of Paulson's Troubled Asset Relief Program, cautions that reports of the discussions among Lewis, Paulson and Fed chief Ben Bernanke may overstate the pressure that was applied to Lewis.

"You need to talk to all the participants in the conversation before you can come up with a conclusion of 100% of what happened," he told Thursday.

Paulson generally confirmed Lewis' account, the Cuomo report said.

"Their discussions centered on the Fed lawyers' opinion that the merger contract was binding, and the U.S. Treasury's commitment to ensuring that no systemically important financial institution would be allowed to fail," Paulson's office added in a statement Thursday.

The Federal Reserve said it did not ask Lewis to stay quiet about his concerns.

"No one at the Federal Reserve advised Ken Lewis or Bank of America on any questions of disclosure," said Michelle Smith, a spokeswoman for the Fed. "It has long been the Federal Reserve's view that questions of this nature are best addressed by individual institutions and their legal counsel."

An SEC spokesman said late Thursday that the commission is reviewing the report.

"We have been actively reviewing the disclosure surrounding the merger between Bank of America and Merrill Lynch," SEC spokesman John Nester said in an e-mailed statement. "The issues identified in New York Attorney General Andrew Cuomo's letter are part of our review."

Angry shareholders to grill Lewis

Lewis is due to address BofA's investors -- who have seen the value of their holdings plunge over the past year, as the bank has been buffeted by collapsing asset values and a pair of questionable acquisitions -- next Wednesday at the bank's annual shareholder meeting in Charlotte, N.C.

Finger, a longtime BofA shareholder who is trying to unseat Lewis and some board members at the meeting, said the allegations in the Cuomo report chip away at the already impaired credibility of Lewis and his board.

Finger and other big investors, including giant pension plan operator TIAA-CREF, have said they won't vote for Lewis at the meeting.

"The key issue here is transparency, and shareholders' right to know crucial facts about the acquisition of Merrill Lynch," said Connecticut treasurer Denise Nappier, who runs the $20 billion state retirement fund and has demanded Lewis's resignation. "Our right to transparency trumps any concern Lewis may have had about saving his job or keeping the current board in place."

Gary Lutin, who runs the Shareholder Forum investor advocacy group in New York, says the most damning allegations in the Cuomo report come from the minutes of the BofA board meetings Dec. 22 and 30 of last year.

These minutes describe the "detailed oral assurances" federal regulators supposedly made to BofA executives. The Federal Reserve and Treasury agreed to provide financial support to the bank after it completed its acquisition of Merrill Lynch and before the bank's scheduled Jan. 20 earnings release, the minutes said.

On Jan. 16, the bank and regulators announced that the government did cough up $20 billion in new capital and $118 billion in asset guarantees for Bank of America. BofA had received $25 billion, counting Merrill's allocation, in the first round of TARP funding.

But in late December, before the deal's Jan. 1 completion, regulators couldn't make those promises in writing, according to the minutes, "because any written assurances would require formal action by the Fed and Treasury -- which formal action would require public disclosure."

The lack of formal written agreements at the time BofA decided to go through with the deal suggests neither party was faithful to its own decision making processes and disclosure duties, said Lutin, whose forum has been questioning the reliability of corporate disclosures since the dot-com insanity a decade ago.

An oral promise might be tougher to enforce in a legal dispute -- but if it was made in good faith, Lutin wondered why the bank wouldn't disclose it.

"Secretary Paulson said he could not provide a letter because there was not yet a specific action plan and he believed that Treasury releasing a vague letter reiterating Treasury's public commitment to prevent systemically important institutions from failing would not help Bank of America but would instead rattle markets by creating more questions than it answered," Paulson's statement said. "Questions of BofA's disclosures were left up to Bank of America."

Cynics might venture that BofA didn't disclose the information because it didn't want to further stress out shareholders. The bank lost two-thirds of its market value between October and the middle of December.

Regardless of the ramifications, corporate officers are duty bound to disclose material information. So if the Cuomo report's account is accurate, Lutin said, "it would mean Lewis is a wimp as well as a liar." senior writer Jennifer Liberto contributed to this report To top of page

First Published: April 23, 2009: 3:50 PM ET

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