Bonus Round

Does this have any chance of succeeding?

A federal judge yesterday allowed Ohio pension systems to proceed with their legal claims that Bank of America paid billions of dollars in bonuses to executives of a firm it was absorbing without informing shareholders, Ohio Attorney General Richard Cordray said.

U.S. District Judge P. Kevin Castel denied motions by Bank of America and Merrill Lynch, which the banking giant acquired in September 2008 amid the financial crisis, to dismiss the state’s lawsuit against the companies and their executives.

Ohio’s pension funds claim that the companies committed securities fraud and issued false proxy statements by issuing $5.8 billion in accelerated year-end bonuses to executives and employees and failed to disclose that information to shareholders before they agreed to allow the companies to merge.

Specifically, the court indicated that the following claims could proceed:
Securities fraud claims against Bank of America, Merrill Lynch and their respective CEOs, Ken Lewis and John Thain, for alleged misstatements related to the failure to disclose the agreement to pay up to $5.8 billion in discretionary bonuses, and against Ken Lewis and Bank of America for alleged omissions related to the bonus arrangement.
False proxy statement claims against Ken Lewis, John Thain, Bank of America, Merrill Lynch and certain Bank of America directors about the bonus arrangement.
False proxy statement claims against all defendants arising out of their failure to disclose Merrill’s fourth quarter 2008 losses.
Liability claims against certain officers and directors for issues under their control.
Claims relating to false offering statements that misstated or omitted Merrill’s bonus payments.
The district court dismissed certain securities fraud claims, including claims relating to the failure to disclose Merrill Lynch’s fourth quarter 2008 losses.

Cordray said he was very pleased with the ruling and that the language upholding the false proxy statement claims is particularly helpful. “In the order, Judge Castel held that liability under the false proxy statement claims in this case could be imposed if negligence is shown. He squarely rejected the defendants’ position that the lead plaintiffs must make a more stringent showing of ‘scienter’– knowing or reckless intent to deceive or defraud. We are looking forward to developing evidence against the defendants under this negligence standard,” Cordray stated.

Here’s the ruling

*Thanks so much to Ann Laurie for helping me with Word Press.






41 replies
  1. 1
    AhabTRuler says:

    Maybe I am still being naïve, but 5.8 billion (with a “b”) still seems like way too much money for bonuses.

    No, I know I am still being too naïve.

  2. 2
    debbie says:

    Go, Cordray!

  3. 3
    Cain says:

    @AhabTRuler:

    Maybe I am still being naïve, but 5.8 billion (with a “b”) still seems like way too much money for bonuses.

    Free market at work!

    cain

  4. 4
    Cat Lady says:

    False proxy statements are very very bad.  This thing has legs.

    ETA: If this goes to trial by jury, it’s O-V-A.

  5. 5
    burnspbesq says:

    No f’in way. The Supreme Court has repeatedly held that scienter, and not mere negligence, must be proven. This gets vacated by the Sixth Circuit and sent back down for reconsideration using the correct legal standard. It may survive on remand, but this was a boneheaded maneuver by plaintiffs’ counsel.

    @AhabTRuler:

    Spread that $5.8B across 7K or 8K employees, and the median bonus is probably around a half mil. That’s not outrageous for a highly productive trader or salesperson whose personal efforts send anywhere from 20 mil to a B to the bottom line. It seems hard to believe, but once upon a time, investment banks paid for performance: relatively low base salaries, and huge bonuses when your line of business hit a home run.

  6. 6
    Steve says:

    @burnspbesq: Negligence is the proper standard for a 14(a) claim. You’re mistaken.

  7. 7
    MikeJ says:

    @burnspbesq: Trying to hide it is pretty much proof of a guilty mind, no?

  8. 8
    burnspbesq says:

    @Steve:

    I’m guessing that neither of us has seen the complaint, but the way it is described in the quoted material suggests that it includes both 10(b) and 14(a) causes of action, so I stand by my statement.

  9. 9

    This is just a preliminary motion to dismiss, right? No big deal atm.

  10. 10
    Steve says:

    @burnspbesq: The court correctly held that the 10(b) claims require proof of scienter and the 14(a) claims require only negligence. I did plaintiffs’ class-action work for years and the analysis looks pretty cut and dried to me. Also, the next time the Southern District of New York gets reversed by the Sixth Circuit will be the first.

  11. 11
    Steve says:

    @arguingwithsignposts: The motion to dismiss is a really big deal in securities cases, thanks to the Private Securities Litigation Reform Act of 1995 that creates a really high pleading standard. Generally, the motion to dismiss is the best hope for defendants, and the cases almost all settle if they get past that stage.

  12. 12
    burnspbesq says:

    @MikeJ:

    Not an implausible way of seeing it – but I’m not on top of developments in securities law, so I’m not going to guess whether that’s consistent with the current state of the law.

    Also too, let’s see what the evidence looks like.

  13. 13
    burnspbesq says:

    @Steve:

    Oopsie, but I’m surprised that an Ohio pension plan would choose not to litigate on home turf. You can get personal jurisdiction over those defendants pretty much anywhere – why go to SDNY if you can go to either NDOh or SDOH?

  14. 14
    Punchy says:

    Not a big fan of the tag. Needs more funneh.

  15. 15
    Omnes Omnibus says:

    @burnspbesq: Some wingnutty judges in Columbus.

  16. 16
  17. 17
    AnotherBruce says:

    @Cain:

    Feedom isn’t free!

  18. 18
    PhoenixRising says:

    @burnspbesq: Why go to NY? Because you’ve been to Columbus.

    Seriously, Ohio federal judges don’t have sympathy for the state throwing the book at banksters who stole my mom’s retirement. Too many years of Republican governance in DC in the 1980s and 1990s. Yes, I include Clinton in that…

  19. 19
    fasteddie9318 says:

    @AhabTRuler:

    Maybe I am still being naïve, but 5.8 billion (with a “b”) still seems like way too much money for bonuses.

    If the bonuses weren’t that big, what incentive would our Titans of Capitalism have to do their jobs as greedily and incompetently as our system demands? What, you expect our banking overlords to work merely in exchange for their salaries? Are you insane?

  20. 20
    Steve says:

    @burnspbesq: Second Circuit law is pretty pro-plaintiff in securities cases, so you almost always want to be there if you can. Generally speaking, no one gets creative with venue in securities class actions because there are going to be a whole bunch of complaints filed and they’re all going to get consolidated in the district that makes the most sense, which is usually wherever the defendant corporation is located. If 15 plaintiffs sue Merrill Lynch in New York and one oddball plaintiff sues them in Ohio, the Ohio court is likely to enter a transfer order without thinking twice.

  21. 21
    kay says:

    @Steve:

    One of the plaintiffs is the Texas teachers retirement system.

  22. 22
    Steve says:

    @kay: Ever since the PSLRA, most of the time the plaintiffs in these big class actions are large public pension funds. Some pension funds have “activist management” meaning they like to get involved in these cases and try to recover funds for the benefit of the plan participants. Because public pension funds invest so much money, they have a lot of dough on the line if one of their big investments blows up.

  23. 23
    Stillwater says:

    Not a lawyer, but I’d have to say this has about a zero percent chance of succeeding (rounding down). The reason isn’t legal (I don’t know shit about the law) but practical: elites won’t abide by commoners reaching their filthy paws into deep pockets because of some trivial grievance. To imagine them ruling the other way is teetering on the edge of something mind-shattering.

  24. 24
    J sub D says:

    Ohio’s pension funds claim that the companies committed securities fraud and issued false proxy statements by issuing $5.8 billion in accelerated year-end bonuses to executives and employees and failed to disclose that information to shareholders before they agreed to allow the companies to merge.

    If true, that is securities fraud. Fortunately, the SEC and Eric Holder are on the case.

    Or not.

  25. 25
    mclaren says:

    burnspbesq offers a preview of the elites’ response: they’ll use legal doubletalk to dismiss it.

    If the doubletalk fails, congress will simply change the law retroactively and make any court judgment go away. “But they can’t do that,” you yelp, “that violates the constitution!”

    Silly rabbit. The constitution went away a long time ago. We now torture and kidnap and assassinate American citizens without charges or a trial. We go to war without congress ever declaring war. We break into peoples’ houses and cars without a warrant and search their premises and we wiretap hundreds of millions of people without a warrant. When the warrantless wiretapping became a potential problem for AT&T with massive court judgments looming, congress simply changed the law retroactively. Poof! Problem gone.

    They’ll do the same thing here. The rule of law now means nothing. Whatever our elites do is legal because they do it. When corporations lie and steal and embezzle, it automatically becomes legal because billionaires have done it. If anyone is foolish enough to try to take ’em to court, there’s a summary judgment…and if things get dicey, congress simply changes the law to make it legal.

    Remember the motto of corporate America:

    “There is no justice — there’s JUST US.”

  26. 26
    Steve says:

    All the polemics about how elites always win are fun, but check out how much the shareholders recovered in the Worldcom litigation, to name just one.

  27. 27
    Platonicspoof says:

    __

    Thanks so much to Ann Laurie for helping me with Word Press.

    I realize John doesn’t pay his bloggers (nor himself) even cat food cash, but since you might be referring to things like block-quoting separate, multiple paragraphs, may I suggest posting a WP tutorial in the FAQ or someplace?

    It would be for common problems like leaving a space by a hyphen; closing html tags (?), or sticking to using the comment buttons; unintentional bolding of block-quotes; block-quoting separate, multiple paragraphs; using the link button; comments going into moderation if there are more than three links (including reply links); the list of WP spam words (plus ‘shoo’ vs. ‘shoos’, spam words within longer words); etc.

    The WP web pages I’ve checked haven’t been much help. Commenters have been great, so maybe a post asking for suggestions (and a way to get someone else to help do the typing).

    Again, the bloggers here might at most get thanks from the commentariat (not talking about site donations), so I’ll understand if no one has the time.

  28. 28
    RareSanity says:

    One thing that I love about this blog is that no matter what the subject, it is always, at least one of the commenter’s specialty.

    Thank you burnspbesq and Steve, for giving the kind of insights I should be getting from the MSM, but they’re too busy chasing Glenn Beck and Sandra Bullock around.

  29. 29
    futzinfarb says:

    @burnspbesq:

    Your argument that the accelerated bonuses aren’t outrageous suggests that the 7,000-8,000 (? source of this figure ?) bonus beneficiaries (@ $20 M – $1 B each) presumably brought in the neighborhood of a trillion dollars or more to the “bottom line” (profit ?) in the period for which their bonuses were given. That figure simply doesn’t seem consistent with what I know about Merrill-Lynch. And I won’t even address whether what accounting there was of profits was real in any sense of that word, or bring up any of the much more populist alarms that could be raised about this situation and your take on it.

  30. 30
    Ripley says:

    …the median bonus is probably around a half mil. That’s not outrageous…

    Is so.

  31. 31
    SiubhanDuinne says:

    @RareSanity #28: Wait, what’s going on between Glenn Beck and Sandra Bullock? Are they an item?

    (Time passes)

    BREAKING: Glenn Beck and Sandra Bullock’s Secret Love Nest Hideaway / / PHOTOS EXCLUSIVE

    (A few weeks pass)

    NEWS ALERT! Glenndra love child due in May, will be named “Black Robe Bollocks” Beck-Bullock. Sarah Palin and Martin Luther King to be godparents. “It’s another miracle!” sobs proud papa-to-be.

  32. 32
    LindaH says:

    If there is anything Ohio is committed to, it’s keeping their Public Employee Retirement funds funded. AG Richard Cordray has already gotten one settlement of $400 million on one securities case and he go AIG to pony up a settlement of $700 million. And he’s going to keep on rolling. Ohio public pensions lost $26 million when the market crashed and our AG is pretty determined to get as much of that back as possible.

  33. 33
    Brandon says:

    @LindaH: How much did Ohio pensions lose in those rare coin investments again? Guess they need to make up those losses too.

    Since I cannot remember anything I learned in lawschool about derivative shareholder lawsuits other than the phrase derivative shareholder lawsuits, I’ll defer the legal analysis to the experts. Of which, it seems @Steve is the most persuasive.

  34. 34
    Pink Snapdragon says:

    Yes, it does have a chance of succeeding. The SEC has already litigated some of these issues in its case against BOA in the SD of NY. You may remember that the judge in that case refused to accept the settlement on the basis that it was inadequate. While BOA did not admit guilt, the ultimate settlement was substantially larger. In addition, Andrew Cuomo also has litigation on behalf of New York State pending.

  35. 35
    Mike Schilling says:

    Capitalism is all about screwing the customers to make money for the shareholders, and then screwing the shareholders to make money for top management.

  36. 36
    debbie says:

    @ Brandon:

    How much did Ohio pensions lose in those rare coin investments again? Guess they need to make up those losses too.

    If that’s a genuine question, Ohio ended up recovering more than Noe stole. The best part is that in an interview in The Dispatch, Noe claimed that since the state had made money off his transactions, his sentence should be commuted and he should get a hearty thanks from the state.

    If facetious/rhetoric/snarky, sorry and never mind.

  37. 37

    Shocking. Merrill Lynch once again part of a securities fraud scandal.

  38. 38
    kay says:

    @burnspbesq:

    Spread that $5.8B across 7K or 8K employees, and the median bonus is probably around a half mil. That’s not outrageous for a highly productive trader or salesperson whose personal efforts send anywhere from 20 mil to a B to the bottom line. It seems hard to believe, but once upon a time, investment banks paid for performance: relatively low base salaries, and huge bonuses when your line of business hit a home run.

    That’s nice, but it isn’t the complaint. Cordray isn’t stupid, and he’s not going to challenge the Master of the Universe’s God-given right to pay themselves handsomely regardless of performance.
    The complaint is that they took the bonus money in the dark, ahead of their investors, and issued false proxy statements to make sure they could get away with the haul before it was discovered.
    Bare bones legality. We no longer expect their compensation to have anything to do with performance, and we no longer expect even a modicum of transparency or fair dealing, because that was way too high a bar for this industry, turns out.
    All we want now is to hold them accountable when they make false affirmative statements, so we can perhaps secure the money before they run off with it, next time.

  39. 39
    Jon Marcus says:

    *Thanks so much to Ann Laurie for helping me with Word Press.

    That’d be Anne Laurie, yes? With an ‘e’?

    Jon “I may be a wee bit sensitive about seeing a name misspelled as a more common name” Marcus

  40. 40
    futzinfarb says:

    @kay:

    This comment thread has focused primarily on the viability of the legal complaint against BOA/M-L but a second theme has been the appropriateness (as opposed to legality) of the compensation to the M-L executives, with, for instance @AhabTRulercalling it into question and @burnspbesq offering a defense. One point I want to make about this latter issue is that it seems to me that one outcome of the financial crisis is that it has brought to light the question of whether executive compensation mechanisms like these, particularly in the financial sector, are not just unfair, but in fact counterproductive and even destructive, fostering all kinds of policies and shenanigans that ultimately undermine corporations even to the extent of threatening the overall economy. I think, there is more than sufficient evidence that many current executive compensation models are a clear and present danger so that it is worth vigorously and genuinely challenging the underlying assumptions, models, and rationales behind the case folks like @burnspbesq make for keeping our grubby “lesser people” noses out of the business of executive compensation.

  41. 41
    LindaH says:

    @Brandon: Actually that wasn’t public pensions, that was the Worker’s comp fund and it happened around the time of the stock market crash under Bush, so oddly enough they broke even and did a little better than if they had been in the stock market. Life’s funny sometimes.

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