In re Bank of Am. Corp.. Sec.

• Decision Date: 27 August 2010
• Docket Number: No. 09 MD 2058 (PKC).,09 MD 2058 (PKC).
• Citation: In re Bank of Am. Corp.. Sec., 757 F.Supp.2d 260 (S.D. N.Y. 2010)
• Parties: In re BANK OF AMERICA CORP. SECURITIES, DERIVATIVE, AND EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA) LITIGATION.This Document Relates to: All Consolidated Securities and Derivative Actions.
• Court: U.S. District Court — Southern District of New York

757 F.Supp.2d 260

In re BANK OF AMERICA CORP. SECURITIES, DERIVATIVE, AND EMPLOYEE RETIREMENT INCOME SECURITY ACT (ERISA) LITIGATION.This Document Relates to: All Consolidated Securities and Derivative Actions.

No. 09 MD 2058 (PKC).

United States District Court, S.D. New York.

Aug. 27, 2010.

MEMORANDUM AND ORDER

P. KEVIN CASTEL, District Judge:

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)and12(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)and23.1.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)andRule 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.

BACKGROUND274I.

FACTUAL HISTORY

274

A.

Parties to the Securities Action

274

B.

Parties to the Derivative Action

275

C.

Negotiations Leading up to BofA's Acquisition of Merrill

276

D.

Negotiations over Merrill's Bonus Pool

276

E.

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

277

F.

BofA Announces Secondary Offering

278

G.

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

278

H.

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

279

I.

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

281

J.

BofA Announces Fourth Quarter Results and Federal Financial Support

283

K.

Claims Asserted in the Securities Complaint

284

L.

Claims Asserted in the Derivative Complaint

284

II.

PROCEDURAL HISTORY

284

DISCUSSION

285I.

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

285

II.

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

286

A.

Thain and Merrill Had No Disclosure Duty to BofA Shareholders

287

B.

Thain and Merrill's Motions to Dismiss the Section14(a)andRule 14a–9 Claims Are Denied

288

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

289

A.

Background on Section10(b)andRule 10b–5

289

B.

Background on Section14(a)andRule 14a–9

289

C.

Potential for Overlapping Damages Between the Direct and Derivative Section14(a) Actions

291

D.

Derivative Plaintiffs Fail to Allege That the Individual BofA Officers Are Liable Under Section14(a) of the '34 Act

293

E.

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

295

1.

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

295

a.

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

295

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

300

2.

For Substantially the Same Reasons, the Derivative Complaint Adequately States a Claim under Section 14(a)andRule 14a–9

302

3.

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

303

4.

For Substantially the Same Reasons, the Derivative Complaint Adequately Alleges That Section14(a)andRule 14a–9 Required the Disclosure of Merrill's Fourth Quarter Losses

307

5.

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

307

a.

Securities Complaint Fails to Plausibly Allege That the Defendants Violated Section10(b)andRule 10b–5 by Failing to Disclose Developments Related to the MAC

307

b.

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

308

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

309

6.

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

309

a.

The Securities Complaint Fails to Plausibly Allege That the Defendants' Representations Concerning Due Diligence Violated Section10(b)andRule 10b–5

309

b.

Similarly, the Derivative Plaintiffs Have Not Adequately Alleged That Statements in the Joint Proxy Regarding Due Diligence Violated Section14(a)andRule 14a–9

312

7.

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

313

a.

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

313

b.

Derivative Plaintiffs' Section 14(a)andRule 14a–9 Claims Based on Statements Regarding the Future Capital Position of BofA and Merrill Are Dismissed

314

8.

Motions to Dismiss the Securities Plaintiffs' Additional Section 10(b)andRule 10b–5 Claims Are Granted in Part and Denied in Part

314

a.

Statements in BofA's Press Release of January 1, 2009 Are Non–Actionable

314

b.

Motion to Dismiss the Section10(b)andRule 10b–5 Claims Is Denied As to BofA's Allegedly Undisclosed Arrangement to Receive Federal Funds

314

c.

Lewis's September 15 Remarks About Merrill's Liquidity Are Non–Actionable

316

d.

Statements by Lewis Regarding Regulator Pressure and Thain's Self–Interest Are Non–Actionable

316

9.

Derivative Plaintiffs' Remaining Section14(a) Claims Against the BofA Directors Are Dismissed

317

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

317

b.

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

318

c.

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

318

d.

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

319

IV.

THE MOTIONS TO DISMISS THE SECTIONS10(b) AND 14(a) CLAIMS FOR FAILURE TO ADEQUATELY PLEAD NEGLIGENCE AND SCIENTER ARE GRANTED IN PART AND DENIED IN PART

320

A.

Securities Plaintiffs Must Adequately Allege Scienter for Their Section10(b) Claims and Negligence for Their Section14(a) Claims

320

B.

Derivative Plaintiffs Also Must Adequately Allege Negligence for Their Section14(a) Claims

322

C.

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

322

D.

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

324

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

325

1.

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

325

2.

Securities Complaint Adequately Alleges Negligence As to the Losses, and Its Section14(a)andRule 14a–9 Claims Survive

326

3.

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

326

F.

Securities Complaint Does Not Allege...