Bank of America agreed on Friday to pay $2.43 billion to settle a shareholder lawsuit over its 2008 buyout of Merrill Lynch in one of the largest-ever settlements of a securities fraud class action.
The accord is by far the biggest settlement of an investor class action arising from the 2008 financial crisis. Bank of America denied allegations it misled shareholders ahead of the Merrill deal, causing them huge losses, but said it agreed to settle to put the case behind it.
The bank expects to incur total litigation expenses of about $1.6 billion in the third quarter ending September 30. It said that expense and a U.K. tax charge would hit quarterly results by about 28 cents per share and likely trigger a loss for the period.
Analysts had expected Bank of America to report earnings of 14 cents per share when it releases results on October 17, according to Thomson Reuters I/B/E/S.
The settlement, which requires court approval, would resolve a case set for an October 22 trial in U.S. District Court in Manhattan. The bank still has other financial crisis-era legal problems outstanding - many involving its 2008 purchase of mortgage lender Countrywide Financial.
The settlement on Friday indicates it may cost more than expected for the bank to resolve issues lingering from the Merrill and Countrywide deals, said Gary Townsend, chief executive of Hill-Townsend Capital in Maryland.
While former Bank of America Chief Executive Kenneth Lewis' decision to buy Merrill in 2008 - at the peak of the financial crisis - helped the U.S. banking system, it has proven costly to shareholders, Townsend said.
Bank of America shares have slid more than two-thirds since the Merrill deal was announced in September 2008.
"It's good to get it behind you," Townsend said. "It's good to get a bad tooth removed. But the question is, 'How expensive was Ken's mistake back in 2008?'"
Lewis had long coveted Merrill's "Thundering Herd" of retail brokers, but in late 2008 he attempted to get out of the deal when Merrill's losses ballooned and threatened the capital of the combined company.
In the face of pressure from then-Treasury Secretary Henry Paulson, Lewis moved forward with the acquisition in January 2009, accepting a $20 billion government bailout to shore up the bank's balance sheet.
Bank of America has since repaid the money. Lewis retired at the end of 2009 and was replaced by Brian Moynihan, who remains CEO.
The Merrill deal was valued at $50 billion when it was announced, but the bank ended up paying $29.1 billion as Bank of America's shares fell.
In a research note on Friday, banking analyst David Trone of JMP Securities said the settlement was "far larger than we expected given the weak merits of such suits and historical precedence."
Prior to this accord, the largest crisis-era investor class action settlement involved allegations Wachovia, now part of Wells Fargo & Co, misled investors about the quality of loans sold before the financial downturn, according to NERA Economic Consulting.
Wells Fargo agreed last year to pay $590 million to resolve that lawsuit, on top of $37 million that auditor KPMG LLP agreed to pay, bringing the total recovery for the investors to $627 million.
Overall, the largest securities fraud settlements in U.S. history include the $7.2 billion agreement with investors stemming from the collapse of Enron; the $6.2 billion WorldCom settlement; and the $3.2 billion agreement over the accounting scandal at Tyco International, according to Stanford Law School's Securities Class Action Clearinghouse.
The Bank of America lawsuit, filed in 2009, contended the bank and its officers made false or misleading statements about the financial health of the bank and Merrill Lynch before the acquisition, causing the bank's stock price to tumble when the facts were revealed.
Under the settlement, the bank will make changes to its corporate governance through January 1, 2015. The bank had agreed to some of the changes as part of a February 2010 settlement with the U.S. Securities and Exchange Commission, including provisions on the independence of its board compensation committee and an annual shareholder vote on executive pay.
Lead plaintiffs in the lawsuit included the State Teachers Retirement System of Ohio, the Ohio Public Employees Retirement System and the Teacher Retirement System of Texas.
"Not only did we accomplish an excellent financial recovery, but other companies will look at the result here and think twice about not fully disclosing all necessary information to their shareholders," Ohio Attorney General Mike DeWine said in a statement.
The settlement was reached after discussions led by a mediator, former federal judge Layn Phillips, lawyers for the plaintiffs said.
A hearing before Judge Castel has been scheduled to discuss the agreement at 3:30 p.m. EDT (1930 GMT) Friday, according to a courtroom deputy in Castel's chambers.
Bank of America shares slipped 8 cents to $8.89 on the New York Stock Exchange.