Stock Drop Suit Hits BoA over Countrywide, Merrill Deals

February 3, 2009 ( - A Bank of America (BoA) employee has hit the financial services giant with a stock drop suit alleging the company's acquisitions of Countrywide Financial Corp. and Merrill Lynch left BoA exposed to "toxic" subprime mortgage-related assets.

BoA employee Vernon C. Dailey’s suit, which seeks class action status, charged that the plan kept company stock as a 401(k) investment option beyond the point when it was still prudent to do so.

According to the complaint, throughout the suggested class period from January 11, 2008, to the present, the plan included stock as an investment option and the plan held over $3 billion in BoA stock, which represented nearly 32% of the plan’s total investments as of December 31, 2007.

Dailey alleged in his lawsuit that BoA breached its Employee Retirement Income Security Act (ERISA) fiduciary duties by making misrepresentations about the company’s failure to adequately assess the merits of BoA’s acquisition of both Countrywide and Merrill.

“[T]he plan’s fiduciaries knew or should have known that, as a result of the acquisition of these two toxic ‘black boxes,’ the financial health of BOA was in serious doubt and that allowing Plan Participants to continue to invest their retirement savings in BOA stock in the wake of these acquisitions was imprudent,” the complaint said.

Dailey alleged in the suit that BoA's Countrywide acquisition in January 2008 catapulted BoA from the fifth largest mortgage originator and sixth largest mortgage to the top of both originating and servicing lists when the U.S. housing market had begun its collapse.

Also, the complaint alleged that BoA only carried out two days worth of due diligence for its agreement to acquire Merrill for $50 billion worth of BoA stock.

Shortly after the Merrill acquisition, BoA announced it would be required to accept money from the federal government's bailout package in exchange for preferred stock of the company. BoA claimed the federal bailout was necessary to "backstop future losses" on $118 billion in "toxic assets" it had acquired primarily from Merrill's portfolio.

The defendants breached their fiduciary duties by encouraging BoA workers to put money into BoA stock and failing to give the employees accurate information about the "grave risks posed by BoA's reckless acquisitions of Countrywide and Merrill Lynch," the lawsuit alleged.

The case is Dailey v. Bank of America Corp.,   S.D.N.Y., No. 1:09-cv-00851-JGK.