BofA silence on Merrill losses may prompt lawsuits

The Bank of America (BOTTOM) and Citibank (R) buildings are seen in the Canary Wharf financial district of London, January 16, 2009.

NEW YORK (Reuters) - Bank of America Corp's (BAC.N) disclosure of massive new losses from its purchase of Merrill Lynch has lawyers asking: what did the bank know and when?

If the bank's management and board are shown to have failed to disclose critical information to shareholders in a timely manner, they could face lawsuits, legal experts said.

Bank of America posted its first quarterly loss in 17 years on Friday and received a $20 billion U.S. government lifeline to help it absorb Merrill, which lost $15.31 billion in the quarter.

The news came as a surprise to investors as Bank of America chose not to reveal the extent of losses until now, even though it had been evaluating its options in mid-December because of steep, unexpected losses at Merrill.

Kenneth Lewis, the chief executive of Bank of America, sought federal assistance in December as the bank's assessment of Merrill's health grew increasingly dire. The Merrill losses were so big he threatened to scrap the estimated $19.4 billion takeover without government help.

But these talks occurred after the shareholders of both companies approved the merger on Dec 5.

In Bank of America's January 1 announcement that the merger had closed, Lewis made no mention of the losses. Instead, he said the combined company -- faced with those losses and without a final commitment from the government to cover some of them -- was "uniquely positioned to win market share and expand our leadership position in markets around the world."

With Bank of America stock near its lowest level in 18 years, lawyers are looking into suing the largest U.S. bank.

Bernstein Litowitz Berger & Grossmann LLP, a prominent securities class-action specialist, is studying the issue, including whether Bank of America should have disclosed sooner the losses it said became evident at Merrill in the middle of December, a partner said.

Legal experts said the absence of more disclosure about Merrill's troubles might lead to shareholder lawsuits, but they believe Bank of America may have a defense if it needed to keep the talks for government support private.

"I am sure somebody will be angry enough to start a suit," said Anthony Sabino, a law professor at St. John's University in the Tobin School of Business. "But whether that action will hold up is hard to say. You are not required to jeopardize a pending deal by disclosing it."

Bank of America declined to comment.

ENOUGH DISCLOSURE?

A lawsuit against the bank could allege securities fraud and negligence for not disclosing the information about Merrill's expected losses, including in the documentation sent to shareholders eligible to vote on the deal.

"There could be a case based on a failure to make full disclosure," said Salvatore Graziano, a Bernstein Litowitz partner.

The issue could also draw the attention of the U.S. Securities and Exchange Commission, lawyers said, although an interest by the agency could raise tricky political issues.

An SEC probe, for instance, would require testimony of U.S. Treasury Department officials, to determine who knew what and when.

"If I were a shareholder, I would want to know in discovery the timing of the bank's finding out these material weaknesses," said Cornelius Hurley, a professor at Boston University School of Law.

CAUGHT OFF-GUARD

During a conference call on Friday, Lewis said the bank was caught off-guard by the extent of the losses.

"It wasn't an issue of not identifying the assets," he said. "It was that we did not expect the significant deterioration which happened in mid- to late December that we saw."

Lewis' view was much more upbeat in September when he stepped in to buy Merrill without government help.

"This was the strategic opportunity of a lifetime," Lewis said at a news conference in September. "This creates the company it would have taken a decade to build."

Now, Bank of America has had to get fresh capital from the government's $700 billion Troubled Asset Relief Program, as well as a guarantee limiting potential losses on $118 billion of troubled assets that mostly come from Merrill.

"We will certainly make a considerate evaluation of these developments," said Daniel Girard, managing partner at law firm Girard Gibbs, which is a counsel in a lawsuit over auction rate securities against Bank of America and other banks.

(Editing by Andre Grenon)

(For more M&A news and our DealZone blog, go to www.reuters.com/deals)