In re MERRILL LYNCH
| Decision Date | 29 March 2011 |
| Docket Number | Master File No.: 07 Civ. 9633 (JSR) |
| Parties | In re MERRILL LYNCH & CO., INC., SECURITIES, DERIVATIVE AND ERISA LITIGATION <br> Derivative Action,07 Civ. 9696 and Lambrecht v. O'Neal,09 Civ. 8259 |
| Court | U.S. District Court — Southern District of New York |
OPINION TEXT STARTS HERE
Pending before the Court are two derivative actions arising from the unprecedented losses experienced by Merrill Lynch & Co., Inc. ("Merrill") as a result of its aggressive investment in collateralized debt obligations ("CDOs") and similar mortgage-backed securities in the period prior to its acquisition by Bank of America ("BofA"). Both actions --a consolidated action known as the "Derivative Action, " 07 Civ. 9696, and a later-filed action, Lambrecht v. O'Neal, originally filed as 08 Civ. 6582 but now refiled as 09 Civ. 8259 -- are so called "double-derivative" actions brought by plaintiffs who were shareholders of Merrill at the time of the alleged wrongdoing and are now shareholders of BofA as a result of the Merrill-BofA stock-for-stock swap. Both actions seek to compel the board of directors of BofA, now the 100% owner of the stock in BofA's Merrill subsidiary, to force its Merrill subsidiary to bring various claims against certain of Merrill's officers and directors in connection with Merrill's allegedly reckless investments. The key difference between the two actions is that the plaintiff in the Derivative Action argues that any demand upon the BofA board to pursue these claims would be futile, whereas the plaintiff in Lambrecht did make a demand upon the BofA board, as well as upon both the pre-merger and post-merger Merrill boards, all of which claims were rejected.
The many defendants in the Derivative and Lambrecht actions have each filed motions to dismiss the respective complaints on various grounds. After careful consideration, and as explained in detail below, the Court concludes that both actions must be dismissed in their entirety. The Court does not take this step lightly, for the allegations of the complaints, if true, describe the kind of risky behavior by high-ranking financiers that helped create the economic crisis from which so many Americans continue to suffer. But a derivative action is brought for the benefit of the company, and nothing here alleged in the complaints raises a reason to doubt that the board of the relevant company, BofA, was at all times fairly positioned to determine whether bringing an action against Merrill's former officers and directors was in the company's interest.
Specifically, with respect to the Derivative Action, the Court concludes that plaintiffs have failed to make a legally adequate showing that the BofA Board was so involved in the underlying wrongdoing alleged in the Derivative complaint that it could not impartially consider a demand to pursue claims against the Merrill officers and directors. And, with respect to the Lambrecht action, the Court concludes that plaintiff has failed to carry the considerable burden of showing that the BofA Board's decision not to bring a lawsuit against the Merrill officers and directors was made in bad faith or was based on an unreasonable investigation.
Both actions have complicated procedural histories. The Derivative Action began as a consolidation of various shareholder derivative actions brought against officers and directors of Merrill as early as 2007. 1 Shortly after an agreement was reached on September 14, 2008 to merge Merrill into BofA, the consolidated plaintiffs filed a Second Amended Verified Complaint to incorporate new allegations related to BofA's announcement of its merger with Merrill (the "Merger").
Separately, back in January, 2008, plaintiff N, A. Lambrecht had sent a demand letter to the Merrill Board that had been rejected, following which she had filed her initial Complaint on July 24, 2008, styled as Lambrecht v. O'Neal, 08 Civ. 6582. Because Lambrecht, unlike the plaintiffs in the Derivative Action, had made a demand upon the Merrill Board, the court granted Lambrecht leave to separately litigate any motion to dismiss the Lambrecht Complaint. See 11/13/2008 Order.
Defendants in both actions filed motions to dismiss, and the Court heard oral argument on January 14, 2009. On February 17, 2009, the Court dismissed both actions on the ground that, as a result of the stock-for-stock swap that implemented BofA's acquisition of Merrill, plaintiffs were no longer Merrill shareholders and therefore lacked standing to pursue derivative claims against Merrill. See 02/17/09 Opinion and Order. The dismissal was without prejudice, however, to plaintiffs, who were now BofA shareholders, filing double-derivative actions demanding that BofA, which had become the 100% shareholder of Merrill as a result of the Merger, pursue the asserted claims against the former Merrill officers and directors.
On July 27, 2009, plaintiff Miriam Loveman, the named plaintiff in the consolidated actions that comprise the Derivative Action, filed a Verified Third Amended Shareholder Derivative and Class Action Complaint ("Third Amended Complaint") that repleaded her claims as a double derivative action; similarly, on September 29, 2009, plaintiff Nancy Lambrecht filed a new, double derivative action under docket number 09 Civ. 8259. 2 Defendants in both actions again moved to dismiss, claiming that plaintiffs still lacked standing unless they could show (a) that they were shareholders of BofA at the time of the underlying Merrill transactions complained of, and (b) that BofA itself was a shareholder of Merrill during the same period. Skeptical of these objections, but finding that Delaware law provided unsatisfactory guidance on these questions, the Court certified both issues to the Delaware Supreme Court. See 03/09/2010 Memorandum Order. On August 27, 2010, the Delaware Supreme Court held that neither of the aforementioned showings was required. See Lambrecht v. O'Neal, 3 A. 3d 277 (Del. 2010).
After the Delaware Supreme Court rendered its decision, the Court granted both plaintiffs leave to amend their complaints if they wished. Plaintiff Lambrecht filed an Amended Complaint on September 14, 2010, and the defendants named therein subsequently filed motions to dismiss. In the Derivative Action, on the other hand, plaintiff Loveman declined the opportunity to amend and rested on her Third Amended Complaint. The Derivative Action parties then submitted supplemental briefing addressing the impact of the Delaware Supreme Court's decision. The Court heard oral argument on both the Lambrecht motion to dismiss and the Derivative Action supplemental briefing on December 14, 2010.
With this lengthy background in mind, the Court turns first to the Derivative Action. In her Third Amended Complaint ("3d Am. Compl. "), plaintiff Loveman alleges that Merrill was the lead underwriter of billions of dollars of CDOs secured by risky, undercollateralized subprime mortgages. 3d Am. Compl, ¶¶ 20, 98101. She alleges that the individual defendants named in the complaint -- who were directors and officers of Merrill at the times of some or all of these underwritings -- were aware of the decline in demand for CDOs and the risks posed by Merrill's overexposure to CDO securities, but that they nonetheless ignored repeated warnings from Merrill's own analysts and executives to lower Merrill's exposure. Id. ¶¶ 108, 112, 118, 121, 188, 189. Instead, plaintiff alleges, the individual defendants further escalated Merrill's CDO exposure despite the risk. She alleges, for example, that in 2005 the individual defendants caused Merrill to begin purchasing the AAA tranches of the CDO securities with its own capital to ensure continued receipt of lucrative underwriting fees, id. 112; that in January 2007 they caused Merrill to purchase First Franklin bank to gain access to an even larger number of subprime mortgages, id. ¶ 124; and that in April 2007 they authorized a $6 billion Stock Repurchase Plan that allowed Merrill to waste a substantial amount of capital on repurchases at what the Merrill Defendants knew or should have known were artificially inflated prices, id, ¶¶ 150-55.
Plaintiff alleges that by the end of June 2007, Merrill had accumulated at least $43 billion in net exposure to CDO securities and subprime mortgages. Id. ¶ 13 2. At that point, the credit "crunch" intensified and demand for CDOs completely stagnated. Id. ¶ 131. Plaintiff alleges that the individual defendants' wrongful conduct forced Merrill to write down more than $8 billion in the value of its CDOs and led to a $2. 2 billion loss in the third quarter of 2007 alone. Id. ¶ 24. This escalated still further to a $10. 3 billion loss in the fourth quarter. Id. ¶ 237. (The first of the lawsuits now consolidated as the Derivative Action was filed in late 2007. )
The huge write-downs and losses continued into 2008, leading ultimately to what plaintiff alleges was defendants' "brokering a panic sale" of Merrill to BofA on September 14, 2008. Id. at p. 139. Plaintiff alleges that the Merger was approved within a period of less than 4 8 hours without any substantive due diligence by the BofA Board. Id. ¶ 4, 291. The terms of the Merger Agreement included indemnification and insurance provisions that insulated the individual defendants from liability "to the fullest extent permitted by applicable law. " Id. ¶ 5 (quoting Merger Agreement at ¶ 6. 6).
On November 3, 2008, Merrill Lynch and BofA filed joint proxy statements with the SEC on Schedule 14A (the "Joint Proxy") seeking shareholder approval for the Merger; this Joint Proxy failed to disclose that Merrill's losses were even greater than previously revealed and that the Merrill and BofA Boards had approved Merrill's payment of billions of dollars in bonuses to Merrill employees, to be paid just prior to the Merger's taking effect on January 1, 2009. Id. ¶¶...
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