In re Bankamerica Corp. Securities Litigation
| Decision Date | 15 December 1999 |
| Docket Number | MDL No. 1264. |
| Citation | 78 F.Supp.2d 976 |
| Parties | In re BANKAMERICA CORP. SECURITIES LITIGATION. |
| Court | U.S. District Court — Eastern District of Missouri |
Martin M. Green, Joe D. Jacobson, Green and Schaff, St. Louis, MO, Daniel S. Peters, St. Louis, MO, Arthur N. Abbey, James S. Notis, Abbey and Gardy, New York, NY, Christi C. Mobley, Martin D. Chitwood, Chitwood and Harley, Atlanta, GA, Jules Brody, Stull and Stull, New York, NY, Andrew J. Entwistle, Vincent R. Cappucci, Entwistle and Cappucci, New York, NY, Clint Krislov, Krislov and Associates, Ltd., Chicago, IL, Robert J. Stein, III, Chicago, IL, Donald H. Clooney, St. Louis, MO, and Daniel W. Krasner, New York, NY, for plaintiff.
Warren Stern, Marc Wolinsky, Wachtell and Lipton, New York, NY, John Michael Clear, Bryan Cave LLP, St. Louis, MO, Diane E. Pritchard, San Francisco, CA, for defendant.
Before the Court is defendants' motion to dismiss plaintiffs' first consolidated and amended class action complaint. For the reasons that follow, defendants' motion is granted in part and denied in part.
NationsBank Corp. (NB), a North Carolina corporation,1 and old BankAmerica (OBA), a Delaware corporation, signed a merger agreement on April 10, 1998, under which OBA would merge with NB in a stock-for-stock transaction. First Consolidated & Am. Class Action Compl. (hereinafter "Compl.") at 16 (Doc. 17). NB shareholders would receive one share of stock in the merged entity, the new BankAmerica Corp. (NBA), for each share of NB stock they owned. Id. OBA shareholders would receive 1.1316 shares of NBA stock for each share of OBA stock owned. Id. at 17. This exchange rate was based on the relative prices of the two banks at the close of business on April 9, 1998. Id. As a result of these exchanges, former NB shareholders would own approximately 54 percent of NBA, and former OBA shareholders would own approximately 46 percent. Id.
On August 4, 1998, NB filed a Form S-4 Registration Statement with the Securities and Exchange Commission (SEC) to register the common stock to be issued in the merger. Id. The Registration Statement included a Joint Proxy/Prospectus issued by both banks to solicit shareholder approval of the merger. Id. The Proxy/Prospectus described the merger as a "merger of equals" in which no premium would be paid to either side. Id. at 27. The term "merger of equals" was explained as shared control of the combined entity by shareholders of both banks. Id. In support of this contention, the Proxy/Prospectus stated that the Board of Directors of the combined entity would contain 11 directors from NB and 9 from OBA. Id. at 28. Further, the document stated that Hugh L. McColl, Jr., then Chairman and Chief Executive Officer of NB, would be Chairman and CEO of NBA, and that David M. Coulter, then CEO of OBA, would become President of the combined bank. Id. Additionally, the Proxy/Prospectus represented that it was the "present intention" of defendants that Coulter would succeed McColl as Chairman and CEO of NBA. Id.
The Proxy/Prospectus incorporated by reference OBA's 1997 Annual Report on Form 10-K and the 1997 Annual Report distributed to shareholders. Id. at 26. The Report described the fact that OBA "established a relationship" with D.E. Shaw & Co. (Shaw) in 1997. Id. The 1997 Annual Report to Shareholders characterized this relationship as one which would enhance OBA's ability to offer additional financial products to its customers. Id. The Report also discussed certain risks associated with OBA's businesses, including the risk of adverse international developments and changes in interest rates, foreign currency rates, and prices of equity securities. Mem. Supp. Defs.' Mot. Dismiss at 4-5.
Shaw was founded in 1988 with a plan to use computer mathematical models to take advantage of market inefficiencies in the pricing of various securities. Compl. at 18. The company would calculate the variances between the model-determined price of a security and the market-determined price. If the model price was lower than the market price, Shaw would sell the security and wait to buy it at a lower price in the future. If the model price was higher than the market price, Shaw would buy the security and wait to sell it a higher price in the future. Id. at 18-19. By leveraging2 its available equity, Shaw was able to obtain and control vast trading positions. By buying or selling in bulk, Shaw was able to capitalize on small variances in the price of securities. Id. at 19.
On March 13, 1997, OBA issued a press release to announce a "strategic relationship" with Shaw which would focus on providing OBA customers with an expanded range of financial products. Id. The release also stated that the agreement between OBA and Shaw was a financing relationship that did not result in any ownership interest by either firm in the other. Id. In subsequent press releases and reports, OBA continued to describe the relationship exclusively in terms of providing its customers with access to a broader range of financial products and services. Id. at 20 ().
The relationship involved a $1.4 billion unsecured loan from OBA to Shaw, which Shaw would manage as a separate trading portfolio. Fifty percent of any resulting profits would be returned to OBA. Shaw ultimately leveraged the $1.4 billion to support a bond portfolio valued at $20 billion. Id. at 21.3 OBA allegedly monitored Shaw's management of the $1.4 billion and the trading positions of Shaw during the course of the relationship through internal reports and other means. Id. at 21-22, 23-24. The extent of this monitoring is disputed by the parties.
In the summer of 1998, Shaw's trading strategy involved selling borrowed United States Treasury bonds and buying riskier bonds, apparently including bonds in foreign corporations, in an effort to profit when and if the price gap between the two financial instruments narrowed. The U.S. Treasuries would be replaced when prices fell. Id. at 22.4 However, the price gap did not narrow. Rather, it widened due in part to Russia's default on its debt on August 17, 1998. Id. 22-23; Mem. Supp. Defs.' Mot. Dismiss at 5. In an increasingly downward spiral, the hedge funds with the most highly leveraged portfolios fell first, which caused the price gap between riskier bonds and U.S. Treasuries to increase even more. As a result, the losses experienced by the remaining funds increased. Compl. at 23.
The crisis forced many financial institutions to declare losses in their foreign securities portfolios. Mem. Supp. Defs.' Mot. Dismiss at 5. OBA made its announcement on August 28, 1998, indicating $220 million in trading losses primarily in the Russian Federation and stating that OBA had reduced its total Russian Federation exposure from $421 million at June 30 to approximately $100 million at August 26. Id.; Compl. at 30. On September 15, 1998, OBA issued another press release reporting an additional $110 million in trading losses, but that the bank still expected to report an after-tax profit excluding merger-related charges of $500 million for the third quarter of 1998. The press release also stated that the market conditions remained volatile and that these projections were subject to change. Compl. at 30; Mem. Supp. Defs.' Mot. Dismiss at 5-6.
On September 15, 1998, NB issued a press release reiterating its support for the merger despite OBA's losses. The merger was approved by the shareholders of both banks at special meetings held on September 24, 1998. Compl. at 30. The merger was completed on September 30, 1998. Id. On October 1, 1998, defendants held a press conference to discuss the completion of the merger. During this conference, McColl, Chairman and CEO of NBA, stated that NBA had outstanding loans to hedge funds in an amount "below $300 million" and that the company had an "investment" in Shaw. Id. at 31. The statement also allegedly falsely represented that all of such loans were secured. Id.
On October 14, 1998, NBA stated in its Third Quarter Earnings Release that it was forced to take a $372 million charge-off of the Shaw loan and to reverse $70 million in income related thereto. Id. at 33. Additionally, the company revealed that its investment in the relationship was $1 billion after the charge-off. Id.; Mem. Supp. Mot. Dismiss at 7. In order to protect this investment, NBA was forced to purchase Shaw's $20 billion fixed-income securities portfolio in order to avoid an additional $175 million in losses that would flow from the liquidation of those securities. Compl. at 33. The company also disclosed the existence of approximately $400 million in other hedge fund exposure which was substantially collateralized. Id.; Defs.' Mot. Dismiss, Ex. H, at 5. As a result, NBA's stock price fell $5-15/16 per share on October 14, 1998. Compl. at 33.
On October 16, 1998, The Wall Street Journal reported an interview with James Hance, NBA's Chief Financial Officer. The article stated that "BankAmerica Corp. knew as early as August about losses at its high-risk trading operation with D.E. Shaw & Co. but decided not to disclose the problem until this week because it feared the publicity could cause the bank to lose its entire $1.4 billion loan to the fund." Rick Brooks & Mitchell Pacelle, BankAmerica Knew in August of Trading Woes, Wall St. J., Oct. 16, 1998, at A3. The article also reported that Hance stated that he and McColl, along with other top executives, had been scrambling since late September...
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