Bank of America 2010 Annual Report Download - page 203

Auction Rate Securities Litigation
Since October 2007, the Corporation, Merrill Lynch and certain affiliates have
been named as defendants in a variety of lawsuits and other proceedings
brought by customers and both individual and institutional investors regarding
ARS. These actions generally allege that the defendants: (i) misled the
plaintiffs into believing that there was a deeply liquid market for ARS, and
(ii) failed to adequately disclose their or their affiliates’ practice of placing
their own bids to support ARS auctions. Plaintiffs assert that ARS auctions
started failing from August 2007 through February 2008 when the defen-
dants and other broker-dealers stopped placing those “support bids.” In
addition to the matters described in more detail below, numerous arbitrations
and individual lawsuits have been filed against the Corporation, Merrill Lynch
and certain affiliates by parties who purchased ARS and are seeking relief
that includes compensatory and punitive damages totaling in excess of
$1.8 billion, as well as rescission, among other relief.
Securities Actions
The Corporation and Merrill Lynch face a number of civil actions relating to the
sales of ARS and management of ARS auctions, including two putative class
action lawsuits in which the plaintiffs seek to recover the alleged losses in
market value of ARS securities purportedly caused by the defendants’ ac-
tions. Plaintiffs also seek unspecified damages, including rescission, other
compensatory and consequential damages, costs, fees and interest. The first
action, In Re Merrill Lynch Auction Rate Securities Litigation, is the result of
the consolidation of two separate class action suits in the U.S. District Court
for the Southern District of New York. These suits were brought by two
customers of Merrill Lynch, on behalf of all persons who purchased ARS in
auctions managed by Merrill Lynch, against Merrill Lynch and its subsidiary
Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPFS). On March 31,
2010, the U.S. District Court for the Southern District of New York granted
Merrill Lynch’s motion to dismiss. On April 22, 2010, a lead plaintiff filed a
notice of appeal to the U.S. Court of Appeals for the Second Circuit, which is
currently pending. The second action, Bondar v. Bank of America Corporation,
was brought by a putative class of ARS purchasers against the Corporation
and Banc of America Securities, LLC (BAS) and is currently pending in the
U.S. District Court for the Northern District of California. The Corporation and
BAS have filed a motion to dismiss the amended complaint, which remains
pending.
Antitrust Actions
The Corporation, Merrill Lynch and other financial institutions were also
named in two putative antitrust class actions in the U.S. District Court for
the Southern District of New York. Plaintiffs in both actions assert federal
antitrust claims under Section 1 of the Sherman Act based on allegations that
defendants conspired to restrain trade in ARS by placing support bids in ARS
auctions, only to collectively withdraw those bids in February 2008, which
allegedly caused ARS auctions to fail. The plaintiff in the first action, Mayor
and City Council of Baltimore, Maryland v. Citigroup, Inc., et al., seeks to
represent a class of issuers of ARS that the defendants underwrote between
May 12, 2003 and February 13, 2008. This issuer action seeks to recover,
among other relief, the alleged above-market interest payments that ARS
issuers allegedly have had to make after the defendants allegedly stopped
placing “support bids” in ARS auctions. The plaintiff in the second action,
Mayfield, et al. v. Citigroup, Inc., et al., seeks to represent a class of investors
that purchased ARS from the defendants and held those securities when ARS
auctions failed on February 13, 2008. Plaintiff seeks to recover, among other
relief, unspecified damages for losses in the ARS’ market value, and rescis-
sion of the investors’ ARS purchases. Both actions also seek treble damages
and attorneys’ fees under the Sherman Act’s private civil remedy. On Janu-
ary 25, 2010, the court dismissed both actions with prejudice and the
plaintiffs’ respective appeals are currently pending in the U.S. Court of
Appeals for the Second Circuit.
Checking Account Overdraft Litigation
Bank of America, N.A. (BANA) is currently a defendant in several consumer
suits challenging certain deposit account-related business practices. Three of
the suits are presently part of a multi-district litigation (MDL) proceeding
involving approximately 65 individual cases against 30 financial institutions
assigned by the Judicial Panel on Multi-district Litigation to the U.S. District
Court for the Southern District of Florida. The three cases, Tornes v. Bank of
America, N.A., Yourke, et al. v. Bank of America, N.A., et al. and Knighten v.
Bank of America, N.A., allege that BANA improperly and unfairly increased the
number of overdraft fees it assessed on consumer deposit accounts by
various means. The cases challenge the practice of reordering debit card
transactions to post high-to-low and BANA’s failure to notify customers at the
point of sale that the transaction may result in an overdraft charge. The cases
also allege that BANA’s disclosures and advertising regarding the posting of
debit card transactions are false, deceptive and misleading. These cases
assert claims including breach of the implied covenant of good faith and fair
dealing, conversion, unjust enrichment and violation of the unfair and decep-
tive practices statutes of various states. Plaintiffs generally seek restitution of
all overdraft fees paid to BANA as a result of BANA’s allegedly wrongful
business practices, as well as disgorgement, punitive damages, injunctive
relief, pre-judgment interest and attorneys’ fees. Omnibus motions to dismiss
many of the complaints involved in the MDL, including Tornes, Yourke and
Knighten, were denied on March 12, 2010. Trial is currently scheduled for
March 26, 2012. A fourth putative class action, Phillips, et al. v. Bank of
America, N.A., which includes similar allegations, will shortly become part of
the MDL proceedings.
In December 2004, BANA was also named as the defendant in Closson, et
al.v.BankofAmerica,etal., a putative class action currently pending in the
California Court of Appeal, First District, Division 1, which also challenges
BANA’s practice of reordering debit card transactions to post deposits in
high-to-low order. Closson asserts claims for violations of California state law,
and seeks restitution, disgorgement, actual and punitive damages, a correc-
tive advertising campaign and injunctive relief. BANA entered into a settle-
ment in Closson, which received final approval by the Superior Court of the
State of California for the County of San Francisco on August 3, 2009. The
settlement provides for a $35 million payment by BANA in exchange for a
release of the claims against BANA by the members of the nationwide
settlement class. Several settlement class members who objected to the
final approval of the settlement have appealed. If the Closson settlement is
affirmed, it will likely bar the claims of many of the putative class members in
Tornes, Yourke and Knighten, as many of those class members are covered by
the putative class in Closson.
On January 27, 2011, the Corporation reached a settlement in principle
with the lead plaintiffs in the MDL, subject to complete final documentation
and court approvals. The settlement will provide for a payment by the Cor-
poration of $410 million (which amount was fully accrued by the Corporation
as of December 31, 2010) in exchange for a complete release of claims
asserted against the Corporation in the MDL. The settlement also contem-
plates that a stay will be requested in the Closson appeal and that, when this
settlement becomes effective, the appeal in Closson will be withdrawn and
the settlement in Closson will be effectuated according to its terms.
Countrywide Bond Insurance Litigation
The Corporation, Countrywide Financial Corporation (CFC) and various other
Countrywide entities are subject to claims from several monoline bond
insurance companies. These claims generally relate to bond insurance pol-
icies provided by the insurers on certain securitized pools of home equity lines
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