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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - xRICHARD DELMAN, derivatively
on behalf of the Nominal Defendant,
Civil Action No.:
Plaintiff,
=against --
VERIFIED SHAREHOLDER
DERIVATIVE COMPLAINT
CHARLES K. GIFFORD, D. PAUL JONES,
JR., FRANK P. BRAMBLE, SR., MONICAC. LOZANO, THOMAS J. MAY, VIRGIS
W. COLBERT, CHARLES O. HOLLIDAY,
BRIAN T. MOYNIHAN, DONALD E.
POWELL, MUKESH D. AMBANI, SUSAN
S. BIES, CHARLES O. ROSSOTTI and
CHARLES H. NOSKI,
JURY TRIAL DEMANDED
Defendants,
--and--
BANK OF AMERICA CORP., a Delaware
corporation,
Nominal Defendant.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
Plaintiff Richard Delman ("Plaintiff') brings this action derivatively on behalf of nominal
defendant Bank of America Corporation ("BAC" or the "Company") against certain directors
and officers of BAC named herein (the "BAC Defendants"). Plaintiff bases his allegations on
actual knowledge as to his own acts and on information and belief as to all other allegations,
after due investigation by counsel.
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I. NATURE AND SUMMARY OF THE ACTION
1. This action arises from Defendants' wrongdoing subsequent to the acquisition by
BAC of Countrywide Financial Corp. ("CWC"). Prior to the CWC acquisition, as publicly
disclosed by its then President and Chief Executive Officer, Kenneth Lewis, BAC performed one
of the most thorough due diligence investigation the Company had ever done.
2. Thus, at the time the CWC acquisition closed in July 2008, BAC management and
its Board had a full understanding of the potential liabilities which might arise in the future.
Rather than coming clean, or resolving the CWC issues, BAC management and the Board
adopted a wrongful and obstinate policy: refusing to cooperate with government regulators
investigating the Company's mortgage foreclosure practices; obtaining reimbursement on
government guaranteed mortgages which were likely violative of the False Claims Act; failing
to comply with an Arizona Consent Decree requiring that BAC fairly entertain mortgage
modifications; engaging in massive "Robo-Signing" of foreclosure documents; agreeing to
cease Robo-Signing, but then resuming Robo-Signing despite its questionable legality. ("Robo
Signing" is the bulk execution of foreclosure-related documents without actual review for
accuracy and adequacy).
3. Despite the BAC Board having detailed knowledge of the extensive due diligence
behind the CWC acquisition, BAC is now facing very substantial liability arising out or related
to: (a) BAC's stonewalling of the investigation of the Office of the Inspector General ("OIG") of
the Department of Housing and Urban Development ("HUD") investigating BAC's Robo-
Signing of mortgage foreclosure documents for fiscal 2009 and 2010, and possible violations of
the False Claims Act by seeking government reimbursement on such foreclosures; (b) Potential
claims by the 50 state taskforce investigating wrongdoing in the mortgage foreclosure market
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(the "State Mortgage Foreclosure Task Force"); (c) a securities class action against BAC; (d) An
enforcement action by Arizona accusing BAC of repeatedly violating a previously executed
Consent Judgment whereby BAC had agreed to provide qualified home owners with mortgage
modifications; for engaging in a pattern of consumer fraud by misrepresenting to homeowners
that they were not eligible for the modification program; and for foreclosing on such eligible
homeowners; (e) an enforcement action by Nevada accusing BAC of repeated violating the
Nevada consumer protection act for engaging in a pattern of consumer fraud by misrepresenting
to homeowners that they were not eligible for the mortgage modification program, and for
foreclosing on such eligible homeowners; (f) a separate investigation by the New York Attorney
General into BAC's mortgage foreclosure conduct; and (g) conduct by BAC constituting the
intimidation of its employees for disclosing major wrongdoing at the Company. As a result BAC
is now facing inter alia very substantial fines and financial liabilities such that these material
adverse developments may threaten its required capital ratios and its liquidity. Indeed, on August
25,2011 BAC was forced to accept a $5 billion preferred stock investment from investor Warren
Buffett, on highly disadvantageous terms.
4. The BAC Board knew that BAC was legally obligated to proceed with legacy
mortgage foreclosures in a prudent lawful manner. This did not occur. Rather, the Board wholly
failed to rein in management. On the contrary, it let management engage in blatantly unlawful
excesses as outlined above and as discussed in detail below. The BAC Board is composed of
banking, finance and business professionals who fully understand the issues facing BAC, and
who fully appreciate why its response need to be lawful and transparent. Nonetheless, the Board
ignored numerous clear-as-day reports of irregularity bordering on fraud, and allowed the
Company to get drawn in to additional illegality, materially raising BAC's potential liability. As
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a result, the BAC Board breached its fiduciary duty and should be held liable to BAC for the
harm it has caused.
II. JURISDICTION AND VENUE
5. This Court has jurisdiction over this action pursuant to 28 U.S.C 1331 (federal
question jurisdiction) insofar as this action arises under both Section 1O(b) of the Securities
Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. 78j(b), pursuant to which there is a
private right of action for contribution, and Section 21D of the Private Securities Litigation
Reform Act, 15 U.S.C. 78u-4, which governs the application of any private right of action for
contribution asserted pursuant to the ExchangeAct. Prior to Congress having enacted an express
provision for contribution under Section 21D of the Exchange Act, the United States Supreme
Court recognized that a federal cause of action existed for contribution pursuant to Section 1O(b)
of the Exchange Act and Rule 10b-5. S ee M usic k, P ee le r & Garrnett v. E m plo yers In su ra nce o f
Wausau, 508 U.S. 286 (1993). Thus, pursuant to federal statutory law and Supreme Court
authority, this Court has original federal question jurisdiction over the Federal contribution claim
alleged herein. This Court also has subject matter jurisdiction over the pendent state law claims
asserted herein pursuant to 28 U.S.C. 1367 (supplemental jurisdiction), since this statute provides
that the district court has supplemental jurisdiction over all other claims where, as here, they are
so related to claims in the action within the original jurisdiction of the Court, that they form part
of the same case or controversy.
6. This Court also has jurisdiction over all claims asserted herein pursuant to 28 U.
S.C. § 1332 in that complete diversity exists between Plaintiff and each of the Defendants and
the amount in controversy exceeds $75,000 exclusive of interests and costs.
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7. This action is not a collusive one designed to confer jurisdiction on a court of the
United States which it would not otherwise have.
8. The Court has personal jurisdiction over each Defendant because each either is a
corporation that conducts business in and maintains operations in this District or is an individual
who either is present in this District for jurisdictional purposes, or has sufficient minimum
contacts with this District as to render the exercise of jurisdiction by this Court permissible under
traditional notions of fair play and substantial justice.
9. Venue is proper in this judicial district pursuant to 28 U.S.C. §§1391 because, in
part, BAC is incorporated in Delaware, and because acts and offenses pertinent to the causes of
action stated herein were committed in the State of Delaware.
III. THE PARTIES
A. Plaintiff
10. Plaintiff Richard Delman is a shareholder of BAC and has been so continuously
since at least July 21, 2008. Plaintiff is a citizen of New York.
B. Nominal Defendant
11. Nominal defendant BAC is one of the world's largest financial institutions,
serving individual consumers, small and middle market businesses and large corporations with a
full range of banking, investing, asset management, and other financial and risk-management
products and services. BAC has more than 10 billion shares of common stock outstanding. BAC
is a corporation organized and existing under the laws of the State of Delaware, with its principal
place of business at 100 North Tryon Street, Charlotte, North Carolina, and is accordingly a
citizen of Delaware and North Carolina. BAC has a Board consisting of 12 members. The
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Board has allocated much of its risk oversight responsibilities to the Audit, Credit and Enterprise
Risk Committees.
c. The BAC Director Defendants
12. Defendant Charles K. Gifford ("Gifford") has been a member of the Board since
2004, when BAC acquired FleetBoston, of which Gifford was CEO. He is a member of the
Executive and Credit Committees of the Board and was the Chairman of the Board until replaced
by Lewis. Defendant Gifford serves as both a trustee of NSTAR (an energy utility company) and
a member of the Board of Directors of CBS Corporation. He is a member of the Executive
Committee. Defendant Gifford is a citizen of North Carolina. As the BAC Proxy Statement
dated March 30, 2011, p. 3, makes clear, Defendant Gifford is well experienced in the banking
business:
Mr. Gifford's banking career with our company and one of our predecessorcompanies, FleetBoston Financial Corporation, brings in-depth knowledge of thefinancial services industry and significant financial expertise relevant to allactivities of our company. Under his stewardship, Mr. Gifford transformed thestrategic direction of a regional bank during a recessionary period to create one of
the largest financial services companies in New England. His historicalperspective and managerial and leadership experience through past economiccycles provide valuable insight on the issues facing our company's businesses.
13. Defendant D. Paul Jones, Jr. has been a Director since June 2009. He is the
former chairman and chief executive officer of Compass Bancshares, Inc. and was with that
Bank from 1978 through its acquisition by Spanish bank BBVA in 2007. He served as chairman
and chief executive officer of that Alabama-based banking company from 1991 through 2007.
He was a member of the Board of Directors of the Federal Reserve Bank of Atlanta from 1994to
2000. Jones began his career in 1967 with the Birmingham law finn Balch &Bingham. He is
currently Of Counsel to that finn and a member of its Financial Institutions Group. He is a
member of the Audit and Corporate Governance Committees. Defendant Jones is a citizen of
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Alabama. As the BAC Proxy Statement dated March 30, 2011, p. 4, makes clear, Defendant
Jones is well experienced in the banking business:
Mr. Jones has government and regulatory experience as well as experienceleading a large bank holding company through growth and acquisition. Mr. Jonespracticed as a financial institutions and regulatory attorney and was involved inthe formulation of legislative policy for the banking industry as a Director of theFederal Reserve Bank of Atlanta and as a participant in several banking industrygroups. His legal background and his work with the Federal Reserve Bank ofAtlanta has given him a professional perspective and in-depth experience with thecomplex laws and regulations applicable to our company and to our businesses.
14. Defendant Frank P. Bramble, Sr. ("Bramble") has been a member of the Board
since 2006, when BAC acquired MBNA. He was an advisor to the Executive Committee from
April 2005 to December 2005 and Vice Chairman from July 2002 to April 2005 of MBNA
Corporation. He was a director from April 1994 to May 2002 and Chairman from December
1999 to May 2002 of Allfirst Financial, Inc. and Allfirst Bank, wholly owned U.S. subsidiaries
of Allied Irish Banks, p.l.c. He is a member of the Enterprise Risk Committee. Defendant
Bramble is a citizen of Delaware. As the BAC Proxy Statement dated March 30, 2011, p. 4,
makes clear, Defendant Bramble is well experienced in the banking business:
Mr. Bramble brings broad ranging financial services expertise as well as historicalinsight to our Board, having held leadership positions at two financial servicecompanies acquired by our company (MBNA Corporation, acquired in 2006, andMNC Financial, acquired in 1993). As a former executive officer of one of thelargest credit card issuers in the U.S. and a major regional bank, he has dealt witha wide range of issues of importance to our company, including credit cycles,sales and marketing of consumers, audit and financial reporting and risk
management.
15. Defendant Monica C. Lozano ("Lozano") has been a member of the Board since
2006. She is Chief Executive Officer of ImpreMedia, LLC, the largest Hispanic news and
information company in the U.S., since May 2010; and Senior Vice President from January 2004
to May 2010. She is Publisher and Chief Executive Officer of La Opinion, a subsidiary of
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ImpreMedia, since January 2004. She was President and Chief Operating Officer of Lozano
Enterprises from 2000 to 2004. She is a member of the Board of Regents of the University of
California since 2001 and Trustee of the University of Southern California since 1991. She is a
member of President Obama's EconomicRecovery Advisory Board since February 2009. She is
a member of the Credit, Corporate Governanceand Executive Committees. Defendant Lozano is
a citizen of California. As the BAC Proxy Statement dated March 30, 2011, p. 4, makes clear,
Defendant Lozano is well experienced in complex financial issues and risk management:
Ms. Lozano is the Chief Executive Officer of the largest Hispanic news andinformation company in the U.S. In this role she has dealt with a wide range of
issues such as operations management, marketing and strategic planning. Herpublic company board service for The Walt Disney Company and her roles withthe University of California and the University of Southern California give her
experience with the issues our company faces, such as governance, riskmanagement and financial reporting. Her experience as a member of PresidentObama's Economic Recovery Advisory Board also gives her valuable perspectiveon important public policy, societal and economic issues relevant to our company.
16. Defendant Thomas J. May ("May") has been a member of the Board since 2004,
when BAC acquired FleetBoston. He is the Chair of the Audit Committee of the Board.
Defendant May serves as both a trustee of NSTAR and a member of the Board of Directors of
CBS Corporation. He is the current Chairman and CEO of NSTAR. He is a member of the
Corporate Governance and Enterprise Risk Committees. Defendant May is a citizen of
Massachusetts. As the BAC Proxy Statement dated March 30, 2011, p. 5, makes clear,
Defendant May is well experienced inmanaging complex business and accounting issues:
As Chairman, Chief Executive Officer and President and the former ChiefFinancial Officer and Chief Operating Officer of NSTAR, a regulated investor-owned electric and gas utility, M r. May has experience with operations, risk
management, international growth and business development, strategic planningand corporate governance matters, which give him a unique insight into the issues
facing our company's businesses today. In addition, as a Certified PublicAccountant, Mr. May brings strong accounting and financial skills, which give
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him a professional perspective on financial reporting and enterprise and
operational risk management.
17. Defendant Virgis W. Colbert has been a BAC Director since January 2009. He is
a Senior Advisor to MillerCoors Company, a beverage manufacturing company, since his
retirement from that company in 2006. He was Executive Vice President of Worldwide
Operations from 1997 to 2005 for Miller Brewing Company, a predecessor of MillerCoors
Company, where he served in a variety of key leadership positions. He has also been a Director
of Lorillard, Inc.; The Manitowoc Company, Inc.; Sara Lee Corporation; Stanley Black &
Decker, Inc. and Merrill Lynch & Co., Inc. He is a member of the Compensation and Benefits,
Corporate Governance and Credit Committees. Defendant Colbert is a citizen of Wisconsin. As
the BAC Proxy Statement dated March 30, 2011, p. 3, makes clear, Defendant Colbert is well
experienced in complex business issues and risk management:
Mr. Colbert has many years of experience in the management and oversight of
international businesses through his professional service with MillerCoors
Company. He brings significant expertise in domestic and international
operations, logistics management, change management and strategic planning.Through his service on other public company boards, he has dealt with a broad
array of issues, including risk management and corporate governance issues.
18. Defendant Charles O. Holliday, Jr. is Chairman of the BAC Board and has been a
Director since September 2009; and Chairman since April 2010. He was previously Chairman
and Chief Executive Officer of DuPont de Nemours and Company and is currently a Director of
CH2M HILL Companies, Ltd.; Deere & Company; Royal Dutch Shell pic (the Netherlands). He
is the Chairman of the Executive Committee. Defendant Holliday is a citizen of Delaware. As
the BAC Proxy Statement dated March 30, 2011, p. 4, makes clear, Defendant Holliday is well
experienced in complex business issues and risk management:
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Through his tenure with DuPont, Mr. Holliday gained extensive experience
leading large, complex, multi-national operations, managing risk and strategic
planning and marketing to a varied customer base. His continued service as
Chairman of DuPont's board following his retirement as Chief Executive Officer
offers him a perspective relevant to his current role as our independent Board
Chairman. Mr. Holliday was a founding member of the International BusinessCouncil furthering his leadership of and experience with large global
organizations.
19. Defendant Brian T. Moynihan is President and Chief Executive Officer of BAC
since January 2010. Prior thereto he was President, Consumer and Small Business Banking
(August 2009 to December 2009); President, Global Banking and Global Wealth Management
(January 2009 to August 2009); General Counsel (December 2008 to January 2009); President,
Global Corporate and Investment Banking (October 2007 to December 2008); and President,
Global Wealth and Investment Management (April 2004 to October 2007). Prior to BAC's
acquisition of FleetBoston Financial Corporation, he served as Executive Vice President of
FleetBoston from 1999 to April 2004, with responsibility for Brokerage and Wealth
Management from 2000 and Regional Commercial Financial Services and Investment
Management from May 2003. He is a member of the Executive Committee. He is named as a
defendant in the Securities Class Action. Defendant Moynihan is a citizen of North Carolina.
As the BAC Proxy Statement dated March 30, 2011, p. 5, makes clear, Defendant Moynihan is
well experienced in the banking business:
Mr. Moynihan has many years of broad financial services experience, including
wholesale and retail businesses, as well as international and domestic experience.
As CEO, he has a deep understanding of all aspects of our company's business. In2009, he led our company in its acquisition and integration of Merrill Lynch &
Co., Inc. His experience leading our consumer banking, commercial banking,
investment banking and wealth management businesses, as well as sales and
trading operations and our legal department at various times gives him a valuable
perspective on our company.
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20. Defendant Donald E. Powell is the Former Chairman, Federal Deposit Insurance
Corporation (FDIC). He has been a Director since June 2009. Previously, he was the Federal
Coordinator for the Office of Gulf Coast Rebuilding from November 2005 to March 2008;
Chairman of the FDIC from August 2001 to November 2005; Chairman, Chief Executive Officer
and President of The First National Bank of Amarillo from 1997 to 2001; he was a member of
the Board of Regents of the Texas A&MUniversity System from 1995 to 2001, during which he
served two terms as Chairman. He is currently a Director of Stone Energy Corporation and QR
Energy L.P. He is a member of the Audit, Compensation and Benefits Committees. Defendant
Powell is a citizen of Texas. As the BAC Proxy Statement dated March 30, 2011, p. 5, makes
clear, Defendant Powell is well experienced in the banking business:
Mr. Powell has vast financial services expertise, having worked in our industry
for over 40 years. As the former Chairman of the FDIC, Mr. Powell provides aunique perspective on the regulatory process and in dealing with regulators andgovernment agencies. In addition, he brings large-scale operations and riskmanagement expertise to our Board through his work as the Federal coordinatortasked with rebuilding plans in the aftermath of Hurricane Katrina and his serviceon the Board of Regents of the Texas A&MUniversity System.
21. Defendant Mukesh D. Ambani is Chairman and Managing Director, Reliance
Industries Limited. He has been a BAC Director since March 2011. He is Chairman and
Managing Director of Reliance Industries Limited, India's largest private conglomerate engaging
in the exploration and production of oil and gas; petroleum refining and marketing; and
petrochemical and retail businesses, since 2002, where he has served in a variety of key
leadership positions since 1981. He is a member of the Compensation and Benefits and Credit
Committees. Defendant Ambani is a citizen of India. As the BAC Proxy Statement dated March
30, 2011, p. 2, makes clear, Defendant Ambabni is well experienced in cutting edge business
issues:
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Mr. Ambani's role as Chairman and Managing Director of Reliance IndustriesLimited provides him with broad experience in the management and oversight oflarge, complex international businesses, and expertise in risk management andstrategic planning. Mr. Ambani has significant experience relevant to ourcompany through building Reliance's leadership positions in refining,
petrochemical exploration and production as well as organized retail. Mr.Ambani's membership on the UN Advocacy Group supporting theimplementation of the Millennium Development Goals provides him furtherexperience with large international organizations.
22. Defendant Susan S. Bies is a former Member, Board of Governors of the Federal
Reserve System. She has been a BAC Director since June 2009. She is on the Senior Advisory
Board Member to Oliver Wyman Group, a management consulting subsidiary of Marsh &
McLennan Companies, Inc., since February 2009; Member of the Securities and Exchange
Commission's (SEC) Advisory Committee on Improving Financial Reporting and Chairman of
that committee's Substantive Complexity Subcommittee from 2007 to 2008; Governor of the
Federal Reserve System from 2001 to 2007; Chief Financial Officer; Chairman of the Asset-
Liability Management Committee and Executive Risk Management Committee; and Executive
Vice President of Risk Management of First Tennessee National Corporation, a regional bank
holding company, where she was employed from 1979 to 2001. She is currently a Director of
Zurich Financial Services Ltd. (Switzerland). She is a member of the Audit and Enterprise Risk
Committees. Defendant Bies is a citizen of Tennessee. As the BAC Proxy Statement dated
March 30, 2011, p. 2, makes clear, Defendant Bies is well experienced in banking and finance:
Both Ms. Bies' role as a Federal Reserve System Governor and her tenure withFirst Tennessee National Corporation provide her with broad expertise in
consumer banking, financial regulation and risk management. In particular, Ms.Bies focused on enterprise financial and risk management during her career withFirst Tennessee National Corporation and further expanded her regulatoryexpertise by serving on the SEC's Advisory Committee on Improving FinancialReporting. Her experience with a primary regulator of our company, as well as
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her other regulatory and public policy experience, give her a unique and valuable
perspective relevant to our company's business, financial performance and risk
oversight.
23. Defendant Charles O. Rossotti has been a Director since January 2009. He is a
Senior Advisor to The Carlyle Group, a private global investment firm, since 2003. Previously
he was the Commissioner of Internal Revenue of the Internal Revenue Service from 1997 to
2002. He co-founded American Management Systems, Inc., an international business and
information technology consulting firm in 1970, where he served at various times as President,
Chief Executive Officer and Chairman of the Board until 1997. He is currently a director of
Booz Allen Hamilton Holding Corporation and the AES Corporation. He was previously a
director of Merrill Lynch & Co., Inc. He is a member of the Audit Committee. Defendant
Rossotti is a citizen of Washington D.C. As the BAC Proxy Statement dated March 30, 2011, p.
6, makes clear, Defendant Rossotti is well experienced in fmance and business:
Mr. Rossotti combines corporate and regulatory experience to provide relevant
expertise in audit, financial reporting, operations and risk management. He co-
founded, led and grew an international business systems/systems integration
consulting firm and subsequently significantly reformed the IRS's organization,service, enforcement strategy and technology. His board service for Booz Allen
Hamilton Holding Corporation and The AES Corporation give him experience
with the issues our company faces, such as financial reporting, risk management
and global operations.
D. Other Defendants
24. Defendant Charles H. Noski, as of June 2011, is vice chairman of BAC and is
responsible for advising the management team on strategic and capital management matters and
working with clients and other key external constituents on behalf of the Company. He joined
BAC as executive vice president and chief financial officer in May 2010, with responsibility for
all finance functions as well as Corporate Treasury, Global Corporate Strategy Planning and
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Development, Investor Relations, Corporate Investments and Global Principal Investments.
Noski is named as a defendant in the Securities Class Action. Noski is a citizen of North
Carolina.
25. The "Class Action Individual Defendants" comprise those defendants named as
defendants in the Securities Class Action, i.e., defendants Moynihan and Noski.
IV. MANAGEMENT STRUCTURE AND RESPONSIBILITIES
26. The BAC Officers and Directors named as defendants in this action had the
unfettered obligation to act in the best interests of the Company, and to effectuate the business of
the Company in a lawful, honest and ethical manner. Indeed, the Company's own internal
documents set forth such obligations.
27. The BAC Code of Ethics provides in part that:
We Honor Our Code
Making good decisions
Countless decisions are made every day at Bank of America. Every decision we
make as an institution and as associates impacts not only the corporation and ourteammates, but our shareholders and communities as well. We all strive to make
good decisions and to do the right thing. However, making decisions is not always
easy. While in certain situations the right result is obvious and the decision can be
made easily, in many situations the right result is less clear-cut or you may be
facing time or other business pressures. Regardless of the nature of a particular
decision, keep the following in mind to help you make informed, thoughtful
decisions:
• Make sure you have the relevant facts.
• Identify potential options and their consequences.
• Take into account relevant laws, standards and policies.
• Consider competing interests.
• Uphold our Bank of America Core Values.
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Fair dealing and responsibilities to customers
At Bank of America, we are expected to deal fairly with our customers,competitors, suppliers and teammates.
• You should not take unfair advantage of anyone through manipulation,concealment, abuse of privileged information, misrepresentation of facts or anyother unfair-dealing practice.
• You must not give or accept bribes, kickbacks, promises or preferentialextensions of credit.
*****
Reporting certain conduct; Code complaints and possible violations
Bankof America can be held criminally liable if one of its associates or agentscommits certain crimes. You must promptly report any knowledge or informationabout unethical conduct by another associate or agent of the corporation that youreasonably believe to be:
• A crime
• A violation of law or regulation
• A dishonest act, including misappropriation of funds or anything of value fromBank of America, or the improper recording of corporation's assets or liabilities
• A breach of trust
You also must report any other circumstances or activities that may conflict with
the Code of Ethics.
28. The BAC Audit Committee failed to do its job. That Committee was charged
with assuring that the Company acted properly and in compliance with all laws and regulations.
As the Audit Committee Charter states in relevant part:
Purpose
The Audit Committee (the "Committee") of Bank of America Corporation (the"Company") is responsible for assisting the Board of Directors of the Company(the "Board") in exercising oversight of (i) the effectiveness of the Company's
system of internal controls and policies and procedures for managing andassessing risk, (ii) the integrity of the consolidated financial statements of the
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Company, and (iii) the compliance by the Company with legal and regulatoryrequirements. The Committee shall also provide direct oversight of the corporateaudit function and the Independent Registered Public Accounting Firm (includingoversight of such accountant's appointment, compensation, qualifications and
independence). In addition, the Committee shall prepare the report that the
Securities and Exchange Commission ("SEC") rules require be included in theCompany's annual proxy statement.
29. This is especially true here since the Committee has the power and the means to
address suchwrongdoing:
Additional Authority and Expenses
The Board delegates to the Committee, in order to further the performance of theCommittee's responsibilities, the power and authority to obtain, at its discretion,advice and assistance from internal or external financial, legal, accounting orother advisors, and to hire and compensate such external advisors at theCompany's expense. The Committee shall determine, in its business judgment,that any such consultants have no relationship to the Company that wouldinterferewith the exercise of their independentjudgment.
30. The Director Defendant members of the BAC Credit Committee were certainly
empowered to address the wrongdoings allegedherein but failed to take any action. As set forth
in the Credit Committee Charter:
Purpose
The Credit Committee (the "Committee") of Bank of America Corporation (the"Company") is responsible for exercising oversight of senior management'sidentification and management of the Company's credit exposures on anenterprise-wide basis and the Company's responses to trends affecting those
exposures, and oversight of senior management's actions to ensure the adequacyof the allowance for credit losses and the Company's credit-related policies.
31. Similarly, the members of the Enterprise Risk Committee did nothing to stop
management from is wrongful conduct as set forth herein, despite having the power to do so. As
set forth in the Enterprise Risk Committee Charter, the Committee had more than ample
authority to investigate and act:
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Purpose
The Enterprise Risk Committee (the "Committee") of Bank of AmericaCorporation (the "Company") is responsible for exercising oversight of seniormanagement's identification of the material risks facing the Company and, except
as allocated by the Board of Directors of the Company (the "Board") to anothercommittee of the Board, oversight of senior management's management of, andplanning for, the Company's material risks, including market risk, interest raterisk, liquidity risk, operational risk and reputational risk. The Committee alsoshall oversee senior management's responsibilities with respect to the Company's
capital management and liquidity planning.
32. Certainly, the Enterprise Risk Committee had the means and authority to
investigate the Company's misconduct and to rein it in:
Committee Authority and Responsibilities
Inperforming its oversight responsibilities as set forth above, the Committee shalloversee senior management's establishment of policies and guidelines, to beadopted by the Board, articulating the Company's risk tolerances as to materialcategories of risk, the performance and functioning of the Company's overall riskmanagement function, as established by the Company's management, and seniormanagement's establishment of appropriate systems (including policies,procedures, management committees and stress testing) that support control of
market risk, interest rate risk and liquidity risk. The Committee shall periodically
review management's strategies, policies and procedures for managing marketrisk, interest rate risk, liquidity risk and reputational risk, and receive and reviewreports from senior management (including the Chief Risk Officer andappropriate management committees) regarding compliance with applicable riskrelated policies, procedures and tolerances, and review the Company'sperformance relative to these policies, procedures and tolerances.
*****
Additional Authority
The Board delegates to the Committee, in order to further the performance of theCommittee's responsibilities, the power and authority to obtain, at its discretion,advice and assistance from internal or external financial, legal, accounting orother advisors, and to hire and compensate such external advisors at theCompany's expense.
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33. The BAC Directors failed to follow the Company's Code of Ethics, and the
various Committee mandates, in that they were aware of on-going material wrongdoing which
was highly publicized, and failed to take any meaningful action. The wrongdoing was notorious
since: (i) there was extensive press coverage, and (ii) unlawful actions were detected and
reported by numerous government regulators and Board members would have become of aware
of such reports by dint of their positions and responsibilities. Yet the Board did nothing to stop,
inter alia, the Robo-Signing, the false claims reimbursements, and the failure by BAe to honor
commitments it signed with the Arizona.
V. FACTUAL ALLEGATIONS
A. Background on the CWC Mortgage Situation Demonstrates that theBAC Directors ofBAC Were Aware of what was Arising in theMarketplace and Chose to Ignore these Major Red Flags
34. As reported in a New York Times article of January 23, 2008, concerning the
ewe acquisition, then CEO Ken Lewis asserted that BAC (and, it may be reasonably inferred,
its Board) was aware of every facet of the ewe acquisition:
We did extensive due diligence. We had 60 people inside the company for almosta month. Itwas the most extensive due diligence we have ever done. So we feelcomfortable with the valuation. We looked at every aspect of the deal, from theassets to potential lawsuits andwe think we have a price that is a good price.
35. Directors of a major bank such as BAC from 2008 on would have been keenly
aware of the major issues which would affect residential mortgages going forward. Indeed, any
director of a major bank would have been aware of the following:
36. Prior the acquisition of ewe, the United States housing bubble had already burst.
Default rates on subprime and adjustable rate mortgages (ARM's), began to increase quickly
thereafter. An increase in loan incentives such as easy initial terms and a long-term trend of
rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they
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would be able to quickly refinance at more favorable terms. Additionally, the economic
incentives provided to the originators of subprime mortgages, along with outright fraud,
increased the number of subprime mortgages provided to consumers who would not have
otherwise qualified for conforming loans.
37. However, once interest rates began to rise and housing prices started to drop
moderately, refinancing became more difficult. Defaults and foreclosure activity increased
dramatically as easy initial terms expired, home prices failed to rise as anticipated, and ARM
interest rates reset higher. There ensued an ongoing foreclosure epidemic, of which subprime
loans are one part, and which continues to be a key factor in the global economic crisis.
38. The credit and home price explosion led to a building boom and eventually to a
surplus of unsold homes, which caused U.S. housing prices to peak and begin declining in mid-
2006. Easy credit, and a belief that home prices would continue to appreciate, had encouraged
many subprime borrowers to obtain adjustable-rate mortgages. These mortgages enticed
borrowers with a below market interest rate for some predetermined period, followed by market
interest rates for the remainder of the mortgage's term. Borrowers who would not be able to
make the higher payments once the initial grace period ended were planning to refinance their
mortgages after a year or two of appreciation. But refinancing became more difficult, once home
prices began to decline in many parts of the USA. Borrowers who found themselves unable to
escape higher monthly payments by refinancing began to default.
39. As more borrowers stop making timely payments on their mortgages, foreclosures
began to dramatically increase as did the supply of homes for sale. This placed additional
downward pressure on housing prices, which further lowered homeowners' equity. The decline
in the number of home owners making timely mortgage payments also reduced the value of
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mortgage-backed securities, which eroded the net worth and financial health of banks and
financial institutions.
40. By September 2008, average U.S. housing prices had declined by over 20% from
their mid-2006 peak. This major decline in house prices meant that many borrowers had zero or
negative equity in their homes. As of March 2008, an estimated 8.8 million borrowers--l0.8% of
all homeowners--had negative equity in their homes, a number that is believed to have risen to
12million by November 2008. By September 2010, 23% of all U.S. homes were worth less than
the mortgage loan. Increasing foreclosure rates increases the inventory of houses offered for
sale. The number of new homes sold in 2007 was 26.4% less than in the preceding year. By
January 2008, the inventory of unsold new homes was 9.8 times the December 2007 sales
volume, the highest value of this ratio since 1981. Furthermore, nearly four million existing
homes were for sale, of which almost 2.9 million were vacant. The overhang of unsold homes
lowered house pnces. As prices declined, more homeowners were at risk of default or
foreclosure.
41. Mortgage underwriting standards declined precipitously during the boom period.
The use of automated loan approvals allowed loans to be made without appropriate review and
documentation. In 2007, 40% of all subprime loans resulted from automated underwriting.
Mortgage fraud by lenders and borrowers increased enormously.
42. In 2004, the Federal Bureau of Investigation warned of an "epidemic" in
mortgage fraud, an important credit risk of nonprime mortgage lending. The number of
suspicious activity reports-reports of possible financial crimes filed by depository banks and
their affiliates-related to mortgage fraud grew 20-fold between 1996 and 2005 and then more
than doubled again between 2005 and 2009. One study places the losses resulting from fraud on
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mortgage loans made between 2005 and 2007 at $112 billion. Lenders made loans that they
knew borrowers could not afford and that could cause massive losses to investors in mortgage
securities.
43. Securitization allowed the banks to bundle residential mortgages as security pools
and issue other securities based on the collateral, sometimes called "MBS" or RMBS". The total
amount of mortgage-backed securities issued almost tripled between 1996 and 2007, to $7.3
trillion. The securitized share of subprimemortgages (i.e., those passed to third-party investors
via MBS) increased from 54% in 2001, to 75% in 2006. A sample of 735 Collateralized Debt
Obligation ("CDO") transactions originated between 1999 and 2007 showed that subprime and
other less-than-prime mortgages represented an increasing percentage of CDO assets, rising from
5% in 2000 to 36% in 2007. American homeowners, consumers, and corporations owed roughly
$25 trillion during 2008. American banks retained about $8 trillion of that total directly as
traditional mortgage loans. Bondholders and other traditional lenders provided another $7
trillion. The remaining $10 trillion came fromthe securitization markets.
44. Mortgage defaults and provisions for future defaults caused profits at the 8,533
USA depository institutions insured by the Federal Deposit Insurance Corporation to decline
from $35.2 billion in 2006 Q4 to $646 million in the same quarter a year later, a decline of 98%.
2007 Q4 saw the worst bank and thrift quarterly performance since 1990. In all of 2007, insured
depository institutions earned approximately $100 billion, down 31% from a record profit of
$145 billion in2006. Profits declined from $35.6 billion in 2007 Ql to $19.3 billion in 2008 Ql,
a decline of 46%.
45. Recognizing the difficulties with BAC's mortgage portfolio, the BAC Board
ignored all of the obvious red flags and allowed the Company to engage conduct post the CWC
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acquisition relating to mortgage foreclosures and FHA applications for reimbursement which, as
described in this Complaint, have exacerbated the Company's problems and its actual and
potential liabilities. This conduct included the widespread Robo-Signing of foreclosure
documents; hindering the Office ofInspector General (the "DIG"), of the Department of Housing
and Urban Development ("HUD") investigation; refusals to comply with an Arizona Consent
Judgment; engaging in consumer fraud with respect to mortgagees in Nevada; risking substantial
liability for repeated violations of the Federal False Claims Act; and allowing conduct to have
occurred which caused BAC to be named as a defendant in a securities class action.
B. BAC Stonewalls the Federal Robo-SigningInvestigation
46. Based on a confidential investigation by the HUD inspector general, details of
which have been leaked to the news media, BAC may have violated the False Claims Act by
seeking Federal Housing Administration (the "FHA") reimbursement on Robo-Signed
foreclosures. The audits of BAC and other financial institutions were completed between
February and March of 2011, and the findings have been referred to the Department of Justice,
which must now decide whether to file charges. As an example to the other major lenders
involved in the Robo-Signing scandal, the DOJ has filed suit against Deutsche Bank seeking
damages pursuant to the False Claims Act.
47. The federal audits mark the latest fallout from the national foreclosure crisis that
followed the end of a long-running housing bubble. Amid reports that many large lenders
improperly accelerated foreclosure proceedings by failing to amass required paperwork, the
federal agencies launched their own probes.
48. Based on leaked stories, the audits are reported to have concluded that the banks
effectively cheated taxpayers by presenting the FHA with false claims by filing for federal
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reimbursement on foreclosed homes that sold for less than the outstanding loan balance using
defective and faulty documents.
49. SAC refused to cooperate with the investigation. Indeed, based on the affidavit
of William W. Nixon sworn to June 1, 2011, SAC engaged in a plan to wholly obstruct the
federal investigation. Nixon was then employed by the HUD Office of Inspector General (the
"OIG"), as an Assistant Regional Inspector General for Audit ("ARIGA") in the Region VI
Office in Fort Worth, Texas.
50. OIG Region VI covers Texas, Oklahoma and New Mexico and consists of 26
employees in five offices. Nixon had between 7 to 10 Senior Auditors and Auditors in multiple
offices working under his direction, performing audits/reviews of HUD programs and those
entities that. receive HUD funding or guarantees.
51. SAC serviced more than 3.8 million loans guaranteed by the FHA. As part of
OfG's strategic objective to improve the effectiveness of the FHA, OIG conducted reviews of the
foreclosure practices of five of the largest servicers as they relate to FHA loans which were
foreclosed upon and for which the servicers have submitted a claim for insurance benefits, the
insurance benefits being provided by the federal government.
52. In October 2010, Nixon was assigned to manage the SAC foreclosure review.
SAC was selected for review because it was one of the five largest servicers of FHA loans
during the review period. During Federal fiscal years 2009 and 2010, SAC submitted 40,219
FHA claimstotaling $5.7 billion. The audit objective was to determine whether SAC had
complied with applicable foreclosure procedures when processing foreclosures on FHA-insured
loans.
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53. As a result of the Robo-Signing of foreclosure documents, and the subsequent
application by BAC to obtain payment by HUDon the mortgages quarantined by the FHA, BAC
may have violated the False Claims Act. Robo-Signing, by its very nature constitutes the false
signing of a court document or affidavit wherein the person signing it avers that he or she has
personal knowledge of the matters therein. Robo-Signed documents are prepared by
automatically by computers, based on the available loan information. If the loan information is
incorrect, then the documentation will be incorrect, but the person signing it has no way of
knowing it since they are not checked. Further any required notarization is often done months
later, in direct contradiction that the documents were personally signed before the notary.
54. The False Claims Act, 31 U.S. C. Section 3729 prohibits one from making a claim
for payment from the United States where such person, inter alia ... knowingly makes, uses, or
causes to be made or used, a false record or statement material to a false or fraudulent claim.
55. Liability under the Act can be enormous. A violator " .. .is liable to the United
States Government for a civil penalty of not less than $5,000 and not more than $10,000, as
adjusted by the Federal Civil Penalties Inflation Adjustment Act of 1990plus 3 times the amount
of damages which the Government sustains because of the act of that person.
56. Since many of the Robo-Signed mortgage foreclosures involved BAC seeking
reimbursement from the FHA for the Company's losses, there is a significant chance that the
government will seek damages from BAC under the False Claims Act for the obtaining of
reimbursement based on false and fraudulent documentation submitted in support of the claim.
57. Nixon's team sought to obtain an understanding of BAC's policies, procedures,
and practices. This included reviewing applicable policies and procedures in effect during the
review period, interviewing staff, and performing a walkthrough. These basic procedures
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provide auditors with an understanding of how BAC operates to comply with mandated
requirements.
58. The review was significantly hindered by BAC's reluctance to allow Nixon's
team to interview employees or to provide data and information in a timely manner or a point of
contact who could explain and clarify data. When interviews were permitted, the presence or
involvement of the BAC's attorneys limited the effectiveness of those interviews. On a number
of occasions, BAC's attorneys refused to allow employees to answer questions.
59. Ultimately Nixon was forced to request the Department of Justice to issue Civil
Investigative Demands ("CIDs") to current and former employees to compel testimony.
Nonetheless, BAC slowed and hindered the production of documents requested by Nixon's team.
Additionally, despite that BAC had agreed to permit Nixon's team to conduct a walkthrough,
BAC personnel later reneged and claimed they did not understand the need for the procedure,
despite the fact that the BAC vice-president who was objecting had Robo-Signed almost 47,000
foreclosure documents and notarized 45 foreclosuredocuments during the review period.
60. Eventually, DIG was forced to issue two DIG subpoenas requesting documents.
Nonetheless, data and information provided in response to the subpoenas were not complete. For
instance, BAC provided only excerpts of subpoenaed personnel files, did not provide complete
foreclosure documents for the items in the sample, provided conflicting affiant information, and
could not identify all authorized notaries. Further, it provided FHA insurance claims data for
only two of its servicing IDs, omitting approximately 4,600 records for its other servicing IDs.
In another instance, BAC provided data that identified signers, notaries, and attorneys for each
claim for only one-third of its FHA claims records. This non-compliance impaired Nixon's
review because it impaired the team frommeasuring the impact ofBAC's foreclosure practices.
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61. The OIG BAC audit is reported to have found that the Company failed to correct
faulty foreclosure practices even after imposing a foreclosure moratorium in October 2010.
Thereafter, BAC said it was resuming foreclosures, having satisfied itself that prior problems had
been solved. (It was later reported in the press that BAC had resumed Robo-Signing
foreclosures in at least one county inNorth Carolina.)
62. Some agencies involved in the settlement discussions among the five banks most
involved in the mortgage foreclosure mess (which includes BAC) expect these banks to pay as
much as $30 billion, with even more costs to be incurred for improving their internal operations
and modifying troubled borrowers' home loans.
63. Certainly the handwriting is on the wall. Recently, the DOJ cited findings from
HUD investigations in a lawsuit it filed against Deutsche Bank AG, one of the world's 10 biggest
banks by assets, seeking recompense of at least $1 billion for defrauding taxpayers by
"repeatedly" lying to FHA in securing taxpayer-backed insurance for thousands of shoddy
mortgages. This lawsuit represents the "model" litigationwhich could be filed against the major
lending banks including BAC.
64. Given that in March, HUD's inspector general found that more than 49 percent of
loans underwritten by FHA-approved lenders in a sample did not conform to the agency's
requirements, BAC clearly has very substantial exposure.
65. Even in light of these investigations, BAC has not halted Robo-Signing. As
Reuters reported on July 18,2011, in a special report entitled "Banks Continue Robo-Signing":
America's leading mortgage lenders vowed in March to end the dubious
foreclosure practices that caused a bruising scandal last year.But a Reuters investigation finds that many are still taking the sameshortcuts they promised to shun, from sketchy paperwork to the use of"robo-signers.II
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*****
One of the industry's top representatives admits that the federalsettlements haven't put a stop to questionablepractices.
Some loan servicers "continue to cut comers," said David Stevens,president of the Mortgage Bankers Association. Nearly all borrowersfacing foreclosure are delinquent, he said, but "the real question iswhether the servicer complied with all legal requirements." The loss of a
home is "the most critical time in a family's life," and if foreclosurepaperwork is faulty homeowners should contest it. "Families should beusing every opportunity they can to protect their rights."
Federal bank regulators signed settlements in March with 14 loan
servicers -- banks and other companies that perform tasks for mortgageinvestors such as collecting payments from homeowners and when
necessary, filing to foreclose. The 14 firms promised further internalinvestigations, remediation for some who were harmed and a halt to thefiling of false documents. All such behavior had stopped by the end of2010, they said.
Of these companies, Reuters has found at least five that in recent monthshave filed foreclosure documents of questionable validity: OneWest,Bank of America, HSBC Bank USA, Wells Fargo and GMACMortgage.
C. State Investigations into BAC's Mortgage Foreclosure Practices
66. Attorneys General in numerous states, armed with what they portray as
incontrovertible evidence of mass Robo-Signings from preliminary investigations, are probing
mortgage practices more closely. It has been reported that various states are investigating or
have filed lawsuits against BAC. The state of Illinois has begun examining potentially
fraudulent court filings, looking at the role played by a unit of Lender Processing Services.
Nevada and Arizona already launched lawsuits against BAC. California may file its own suit.
Delaware sent Mortgage Electronic Registration Systems Inc., which runs an electronic registry
ofmortgages, a subpoena demanding answers to 75 questions.
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67. As reported on June, 2011, New York Attorney General Eric Schneiderman (the
"NTAG") has targeted BAC , in a new probe that questions the validity of potentially thousands
of mortgage securities and their associated foreclosures.
68. The New York inquiry could prove explosive: Wall Street's great mortgage
securitization machine took millions of home loans and bundled them into securities for sale to
investors. If the legal steps that guide securitization -- like taking mortgage documents from one
party to another, a critical step under New York law -- were not undertaken, then the investors
who bought the bundled loans could force the companies to buy them back, compelling them to
eat enormous losses.
69. As reported on July 27, 2011, the NYAG has objected to a proposed State
Mortgage Foreclosure Task Force settlement with major U.S. banks, and his objections are
starting to have a domino effect. Earlier this year, NYAG Schneiderman stood alone against the
federal government's desire to quickly force a settlement between the big banks and attorneys
general from all 50 states about improper loan servicing and foreclosures.
70. The NYAG raised concerns that the banks' push for a quick settlement, protecting
them from future liabilities, would block his office's probe into questionable foreclosure
practices. Now other AG's have echoed Schneiderman's objection, suggesting that the banks
such as BAC may not get a global release of liability. Notwithstanding that, some reports
suggest that the banks would pay up to $20 billion to settle the issue, though no one involved in
the negotiations has confirmed that figure. BAC's share of this would be very substantial.
71. Schneiderman has launched an investigation of the recently announced BAC
proposed $8.5 billion settlement involving 22 large purchasers of RMBS, including BlackRock,
Pimco, MetLife, and the New York Federal Reserve. This proposed settlement must be
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judicially approved, and the trustee has filed a petition in New York State Supreme Court
seeking such approval. Subsequently, on August 4, 2011, the NYAG has moved to intervene in
the action claiming that the settlement may be unfair, as it may block the NYAG from bringing
subsequent legal action against BAC.
D. The Securities Class Action
72. On February 2, 2011, a purported class action was filed in the United States
District Court for the Southern District of New York claiming violations of the federal securities
laws by BAC, defendant Moynihan and defendant Noski. The action (the "Securities Class
Action") is entitled Pennsylvania Public School Employees' Retirement System v. Bank of
America Corp. et al., (Civil Action No. 11-cv-733 (WHP).
73. The allegations of the Securities Class Action are as follows:
1. Introduction To The SecuritiesClassAction
74. The Securities Class Action was brought on behalf of a purchaser class of BAC
securities between January 20, 2010 and October 19, 2010, inclusive (the "Class Period"),
against BAC and certain of its officers and/or directors for violations of the Securities Exchange
Act of 1934 (" 1934 Act").
75. As alleged in the Securities Class Action Complaint, during the Class Period,
defendants issued materially false and misleading statements regarding the Company's business.
Defendants concealed defects in the recording of mortgages and improprieties with respect to the
preparation of foreclosure paperwork that harmed BAC's investors when BAC had to
temporarily discontinue foreclosures and admit to the problems it was experiencing. For much
of the Class Period, defendants also concealed that BAC had previously engaged in a practice
known as IIdoliar rolling," wherein it omitted billions of dollars in debt from its balance sheet
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reported to the public. As a result of defendants' false statements, BAC's stock traded at
artificially inflated prices during the Class Period, reaching a high of $19.48 per share on April
15,2010.
76. On May 20,2010, BAC filed its Form IO-Qfor the first quarter of 2010 in which
it disclosed aspects of its "repo-to-maturity'' transactions ("dollar rolling"), claiming the
transactions did not have a material impact on BAC's balance sheet.
77. Later, on May 26, 2010, The Wall Street Journal reported that BAC had hidden
billions of dollars in debt from investors when reporting its financial statements over the past
three years. InSeptember 2010, news surfaced about foreclosure snafus at BAC and other large
banks due to paperwork issues.
78. On October 8, 2010, BAC announced a nationwide foreclosure halt pending a
review of its foreclosure processes and whether there were irregularities with respect to its
previously completed foreclosure activities.
79. On October 13,2010, the attorneys general of 50 states, led by Iowa, announced a
probe into U.S. banks regarding loan underwriting guidelines and their allowance for credit
losses. The attorneys general launched a joint investigation of the practices banks used In
evicting delinquent borrowers from their homes.
80. After this news, BAC stock fell $0.69 per share to close at $12.60 per share on
October 14, 2010, on volume of 511 million shares.
81. On October 19, 2010, BAC announced its third quarter 2010 financial results,
reporting a net loss of $7.3 billion and a diluted earnings per share CEPS") loss of $0.77. BAC
further reported receiving $18 billion in claims about faulty home loans that it might have to
repurchase.
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82. On this news, BAC stock dropped $0.54 per share, to close at $11.80 per share on
October 19,2010 - a one-day decline of 5% on volume of 574 million shares.
83. Later, on November 16, 2010, a New Jersey Bankruptcy Judge dismissed a BAC
claim against a debtor, citing testimony of a BAC employee who admitted that BAC (through its
acquisition of CWC in July 2008) routinely did not bother to transfer essential documents for
loans sold to investors. As American Banker reported on Monday, November 22, 2010, "The
BAC employee's admission that the lender customarily held on to promissory notes could also
undermine the industry's position that document transfers to securitization trusts are
fundamentally sound."
84. The true facts, which were known by the defendants but concealed from the
investing public during the Class Period, were as follows:
(a) BAC did not have adequate personnel to process the huge numbers of
foreclosed loans in its portfolio;
(b) BAC had not properly recorded many of its mortgages when originated or
acquired, which would severely complicate the foreclosure process if it became necessary;
(c) Defendants failed to maintain proper internal controls related to
processing of foreclosures;
(d) BAC's failure to properly process both mortgages and foreclosures would
impair the ability of BAC to dispose of bad loans; and
(e) BAC had engaged in a practice known internally as "dollar rolling" to
remove billions of dollars of debt from its balance sheet over the prior years.
85. As a result of defendants' false statements and omissions, BAC's common stock
traded at artificially inflated prices during the Class Period. However, after the above revelations
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seeped into the market, the Company's shares were hammered by massive sales, sending them
down nearly 42% from their Class Period high.
86. As alleged in the Securities Class Action, defendants are liable for: (i) making
false statements; or (ii) failing to disclose adverse facts known to them about BAC. Defendants'
fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of
BAC common stock was a success, as it: (i) deceived the investing public regarding BAC's
prospects and business; (ii) artificially inflated the price of BAC common stock; and (iii) caused
plaintiff and other members of the Class to purchase BAC common stock at inflated prices.
87. On July 1, 2008, BAC acquired CWC by issuing 107 million shares of BAC
common stock for 583 million shares of CWC common stock. This acquisition dramatically
increased the number of home mortgage loans serviced by BAC from 4 million pre-acquisition to
14 million post acquisition. Even more significantly, a much higher proportion of CWC loans
were delinquent and likely to lead to foreclosure than those BAC had previously serviced.
88. Prior to the acquisition, CWC had utilized a company called Mortgage Electronic
Registration Systems, Inc. ("MERS") to record the vast number of mortgage loans it was
originating using extremely aggressive lending practices. In order to save time and money on
registering the mortgage liens in the public records of the various counties in which CWC
originated the loans, CWC used MERS to track the movement of the loans through the
securitization process. However, the process led to a great deal of confusion. MERS was to be a
nominee of CWC but not necessarily the mortgagee and not entitled to payments, nor to
foreclose. Through the process of working with MERS, the mortgages on homes became
separated from the notes on the homes. MERS might be the mortgage holder but not the
noteholder. CWC continued to be the servicer but with no real rights to payments or rights to
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foreclose. These defects began surfacing in various foreclosure proceedings in 2009, but the
extent of the problems were concealed by BAC.
89. Following the acquisition, BAC executives decided to use CWC's homegrown
mortgage-servicing technology, but soon discovered that CWC's system did not communicate
well with BAC's system. More alarming, however, was BAC's discovery that information was
missing from many CWC loan files, making it difficult to deal with borrowers. This became a
critical problem when loans went into foreclosure, since paperwork and recording problems
would make it difficult if not impossible to foreclose on certain loans.
90. By year-end 2009, BAC had more than $20 billion in non-performing loans and
was working on tens of thousands of foreclosures. In order to prevent a collapse in BAC's stock
price and prevent borrowers from stopping foreclosures due to faulty procedures, defendants
concealed the paperwork and recording problems associated with the loans which would inhibit
efficient foreclosures.
91. For years prior to 2010, BAC had engaged in a practice intended to make its
fmancial statements appear more favorable. This practice, known in the industry as Repo 105,
involved BAC misclassifying billions of dollars of debt as sales on quarter-end balance sheets.
This practice was concealed from investors at the beginning of the Class Period.
2. False Statements Allegedin the Securities Class Action
92. On January 20, 2010, BAC issued a press release announcing its fourth quarter
and full-year 2009 financial results. The Company reported full-year 2009 net income of $6.3
billion and a net loss for the fourth quarter of2009 of$5.2 billion or a diluted EPS loss of $0.60.
The release stated in part:
"While it's disappointing to report a loss for the fourth quarter, there were a
number of important accomplishments worth noting," said Chief Executive
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Officer and President Brian T. Moynihan. "First, we repaid the American
taxpayer, with interest, for the TARP investment. Second, we have taken steps tostrengthen our balance sheet through successful securities offerings. And third, all
of our non-credit businesses recorded positive contributions to our results."
93. On April 9, 2010, The Wall Street Journal published an article about large banks,
including BAC, which had been concealing their debt levels from investors over the previous
five quarters. The article, entitled "Big Bank Mask Risk Levels; Quarter-End Loan Figures Sit
42% Below Peak, Then Rise as New Period Progresses; SEC Review," stated in part:
Major banks have masked their risk levels in the past five quarters by temporarily
lowering their debt just before reporting it to the public, according to data from
the Federal Reserve Bank of New York.
Excessive borrowing by banks was one of the major causes of the financial crisis,
leading to catastrophic bank runs in 2008 at firms including Bear Steams Cos. and
Lehman Brothers. Since then, banks have become more sensitive about showing
high levels of debt and risk, worried that their stocks and credit ratings could be
punished.
* * * *
"The efforts to manage the size of our balance sheet are appropriate and our
policies are consistent with all applicable accounting and legal requirements," a
BAC spokesman said.
The SEC now is seeking detailed information from nearly two dozen large
financial firms about repos, signaling that the agency is looking for accounting
techniques that could hide a firm's risk-taking. The SEC's inquiry follows recent
disclosures that Lehman used repos to mask some $50 billion in debt before it
collapsed in 2008.
* * * * *
Some banks make big trades that don't show up in quarter-end balance sheets.
That is what happened recently at Bank of America involving a trade designed to
mature before the end of 2009's first quarter, people familiar with the matter say.
Two Bank of America traders bought $40 billion of mortgage-backed securities
from clients for one month, while at the same time agreeing to sell the securities
back before quarter's end, according to people familiar with the matter. This "roll"
trade provided the clients with cash and the bank with fees.
Robert Qutub, then Bank of America's chief financial officer for global markets,
told Michael Nierenberg, a former Bear Stearns trader who oversaw the traders
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who made the roll trade, to cap the size of the short-term transaction, people
familiar with the matter say.
A week later, however, the amount tied to the trade shot up to $60 billion, these
people say, before dropping to $25 billion, one of these people said, appearing to
some at headquarters that the group had defied the order to cap the trade. A bankspokeswoman said "the team was aware of and worked within its risk limits."
94. On April 16, 2010, BAC issued a press release announcing its first quarter 2010
financial results, reporting net income of $3.2 billion or $0.28 diluted EPS. The press release
stated in part:
Two factors primarily drove results in the first quarter:
Provision for credit losses fell by $3.6 billion from the year-ago period, reflectingan improvement in credit quality.
Strong capital markets activity, including record sales and trading driven by
industry-leading corporate and investment banking positions, helped drive results
for Global Banking and Markets.
"With each day that passes, the 2010 story appears to be one of continuing credit
recovery, and our results reflect a gradually improving economy," said Chief
Executive Officer and President Brian T. Moynihan. "Our customers -
individuals, companies, and institutional investors - increasingly see the value of
our integrated capabilities. We also are seeing ample indications that those
integrated capabilities hold promise for long-term shareholder value."
95. On May 7, 2010, BAC filed its Form lO-Q for the quarter ended March 31,2010,
in which it disclosed aspects of its prior failure to accurately report its balance sheets. The Form
10-Q stated in part:
At the end of certain quarterly periods during the three years ended December 31,
2009, the Corporation had recorded certain sales of agency mortgage-backed
securities (NIBS) which, based on a more recent internal review and
interpretation, should have been recorded as secured borrowings. These periods
and amounts were as follows: March 31, 2009 - $573 million; September 30,
2008 - $10.7 billion; December 31, 2007 - $1.8 billion; and March 31, 2007-
$4.5 billion. As the transferred securities were recorded at fair value in trading
account assets, the change would have had no impact on consolidated results of
operations. Had the sales been recorded as secured borrowings, trading account
assets and federal funds purchased and securities loaned or sold under agreements
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to repurchase would have increased by the amount of the transactions, however,the increase in all cases was less than 0.7 percent of total assets or total liabilities.Accordingly, tile Corporation believes that these transactions did not have a
material impact on tile Corporation's Consolidated Balance Sheet.
In repurchase transactions, typically, the termination date for a repurchaseagreement is before the maturity date of the underlying security. However, incertain situations, the Corporation may enter into repurchase agreements wherethe termination date of the repurchase transaction is the same as the maturity dateof the underlying security and these transactions are referred to as "repo-to-maturity" (RTM) transactions. The Corporation enters into RTM transactions onlyfor high quality, very liquid securities such as U.S. Treasury securities orsecurities issued by government-sponsored entities. The Corporation accounts forRTM transactions as sales in accordance with GAAP, and accordingly, de-recognizes the securities from the balance sheet and recognizes a gain or loss inthe Consolidated Statement of Income. At March 31, 2010 and December 31,
2009, the Corporation had outstanding RTM transactions of $3.0 billion and $6.5billion that had been accounted for as sales.
96. On July 16,2010, BAC issued a press release announcing it second quarter 2010
financial results. The Company reported net income of $3.1 billion or $0.27 diluted EPS. The
press release stated in part:
"Our quarterly results show that we are making progress on our strategy to alignaround our three core customer groups - consumers, businesses, and institutionalinvestors - and create the financial institution that customers tell us they want,built on a broad relationship of clarity, transparency, and helping them managethrough challenging times," said Chief Executive Officer and President BrianMoynihan. "We improved our capital foundation through retained earnings, andcredit quality improved even faster than expected. We have the most completefinancial franchise in the world, and we are focused on executing our strategy anddelivering outstanding long-term value to our customers and shareholders."
97. After releasing its second quarter 2010 results on July 16, 2010, BAC hosted a
conference call with investors, media representatives and analysts, during which defendant
Moynihan represented the following:
We did make $3.1 billion in net income for the quarter, but importantly, with theearnings, we are continuing to move our core franchise forward. Our credit
quality continues to improve, in some cases faster than we anticipated as we cameinto this year. As the management team and I put together the principles we're
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going to operate under to make sure that we can position this company now and inthe future in the way it needs to be positioned, one of the principles we've beenfocused on is to continuing [sic] to strengthenour balance sheet.
*****
At the same time, we're devoting a ton of effort and expense to working throughdefaults, short sales and modifications, and we're attempting to help everycustomer we can. In spite of all that hard work, we'll continue to see elevatedforeclosures, short sales and other liquidations for the next several quarters as weclean up the legacy Countrywide portfolio.
98. On October 8, 2010, BAC announced a nationwide foreclosure halt pending a
review of its foreclosure processes and whether there were irregularities with respect to its
previously completed foreclosure activities.
99. On October 13,2010, the attorneys general of 50 states, led by Iowa, announced a
probe into U.S. banks regarding loan underwriting guidelines and their allowance for credit
losses. The attorneys general launched a joint investigation of the practices banks used in
evicting delinquent borrowers from their homes.
100. After this news, BAC's stock fell $0.69 per share to close at $12.60 per share on
October 14, 2010, on volume of 511million shares.
101. On October 19, 2010, BAC announced its third quarter 2010 financial results,
reporting a net loss of $7.3 billion and a diluted EPS loss of $0.77. BAC further reported
receiving $18 billion in claims about faulty home loans that it may have to repurchase.
102. On this news, BAC's stock dropped $0.54 per share, to close at $11.80 per share
on October 19, 2010 -- a one-day decline of 5% on volume of 574million shares.
103. In November 2010, BAC was sorting through 102,000 foreclosure files in five
separate offices, attempting to retroactively document mortgage recording and transfers so it
could complete foreclosures in various locations with varying rules.
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104. Later, on November 16,2010, a New Jersey Bankruptcy Judge dismissed a BAC
claim against a debtor, citing testimony of a BAC employee who admitted that BAC/CWC
routinely did not bother to transfer essential documents for loans sold to investors. As American
Banker reported on Monday, November 22, 2010, "The BAC employee's admission that the
lender customarily held on to promissory notes could also undermine the industry's position that
document transfers to securitization trusts are fundamentally sound."
105. As alleged in the Class Action Complaint, the true facts, which were known by
the defendants but concealed from the investing public during the Class Period, were as follows:
(a) BAC did not have adequate personnel to process the huge numbers of
foreclosed loans in its portfolio;
(b) BAC had not properly recorded many of its mortgages when originated or
acquired, which would severely complicate the foreclosure process if it became necessary;
(c) Defendants failed to maintain proper internal controls related to
processing of foreclosures;
(d) BAC's failure to properly process both mortgages and foreclosures would
impair the ability of BAC to dispose of bad loans; and
(e) BAC had engaged in a practice known internally as "dollar rolling" to
remove billions of dollars of debt from its balance sheet over the prior years.
106. As a result of defendants' false statements and omissions, BAC's common stock
traded at artificially inflated prices during the Class Period. However, after the above revelations
seeped into the market, the Company's shares were hammered by massive sales, sending them
down nearly 42% from their Class Period high.
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107. As alleged in the Class Action Complaint, during the Class Period, as detailed
herein, the defendants made false and misleading statements and engaged in a scheme to deceive
the market and a course of conduct that artificially inflated the price of BAC common stock and
operated as a fraud or deceit on Class Period purchasers of BAC stock by misrepresenting the
Company's business and prospects. Later, when the defendants' prior misrepresentations and
fraudulent conduct became apparent to the market, the price of BAC common stock fell
precipitously, as the prior artificial inflation came out of the price over time. As a result of their
purchases of BAC common stock during the Class Period, plaintiff and other members of the
Class suffered economic loss, i.e., damages, under the federal securities laws.
E. Actions by the States of Arizona and Nevada Charging BAC withFailing to Abide By a Consent Order and for Consumer Fraud
1. Arizona
108. In December 2010, the State of Arizona brought suit against BAC and its
subsidiaries alleging that they had violated a Consent Judgment previously entered into; and had
continued their previous course of deception in violation of Arizona's Consumer Fraud Act by
misrepresenting to consents that they were eligible for modification of their mortgage loans;
when BAC would make a decision on such modification requests; whether BAC had approved
the requests; why such modifications were rejected; and whether and when BAC would
foreclose.
109. The Consent Judgment obligated BAC to make loan modifications in good faith,
but has subsequently moved homeowners toward foreclosure while their modification
applications were pending despite a pledge to halt foreclosures; failing to make timely decisions
on loan modifications, leaving eligible borrowers in limbo; failing to use best efforts to secure
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investor approval of modifications; and failed to timely respond to complaints as to its
performance under the Consent Judgment.
110. Notification by Arizona to BAC that its conduct represented a violation of the
Consent Judgment was rejected by the bank and the litigation followed. In addition, BAC's
conduct towards Arizona consumers was not limited to just a few homeowners. Rather it was
part of a pervasive course of conduct not only on the local level, but nationally ranked last in its
treatment of homeowner requests and complaints.
111. Arizona seeks substantial fines and restitution.
2. Nevada
112. In December 2010 the State of Nevada filed an action against BAC and
subsidiaries alleging that the bank had violated the Nevada Deceptive Trade Practices Act
("DTPA"). In February 2011, the action was removed to the United States District Court for the
District of Nevada, entitled State of Nevada vs. Bank of America Corp. et al., Case No.3: 1111-
cv-00135-RCL(RAM).
113. On August 30, 2011, Nevada sought leave to file its Second Amended Complaint,
(the "Nevada Complaint") which alleges wide-spread and continued wrongdoing by BAC from
2009 to the present.
114. As alleged in the Nevada Complaint, beginning in 2009, BAC violated the
Nevada DTPA by engaging in a pattern and practice of misrepresentations in their loan
modification programs. Specifically, it misled homeowners by:
a. promising to act upon requests for mortgage modifications within a
specific period of time, usually one or two months, but instead stranding consumers without
answers for more than six months or even a year;
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b. falsely promising consumers that their initial, trial payment modifications
would be made permanent if and when they made the required three payments on those plans,
but then failed to convert those modifications;
c. falsely assuring them that their homes would not be foreclosed while their
requests for modifications were pending, but sent foreclosure notices, scheduled auction dates,
and even sold consumers' homes while theywaited for decisions;
d. misrepresenting the eligibility criteria for modifications and providing
consumers with inaccurate and deceptive reasons for denying their requests for modifications;
e. falsely notifying consumers or credit reporting agencies that consumers
were in default when they were not; and
f. offering modifications on one set of terms, but then providing them with
agreements on different terms, or misrepresenting that consumers had been approved for
modifications.
115. BAC's misconduct in misrepresenting its mortgage modification program
continues through the present and was confirmed by Nevada investigators in interviews with
consumers, former BAC employees, and other third parties and through review of relevant
documents.
116. BAC's own former employees describe an environment in which BAC failed to
staff its modification functions with employees with the training, skills, experience, authority,
and information necessary to carry out the Bank's commitments. According to the employees,
the modification process was chaotic, understaffed, wrought with technical problems, and not
oriented to customers. According to at least one former employee, BAC reprimanded them for
spending too much time with individual customers and directed them to limit call times with
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consumers to an average of seven to ten minutes, leaving them almost no time to fully or
accurately answer questions or provide explanations, correct or update relevant information, or
offer assistance.
117. In addition, BAC misrepresented both in communications with Nevada consumers
and in documents they recorded and filed, that they had authority to foreclose upon consumers'
homes as the servicer for the trusts that held these mortgages. Defendants knew (and were on
notice) that they had never properly transferred the mortgages in question to those trusts, failing
to deliver properly endorsed or assigned mortgage notes as required by the relevant legal
contracts and state law.
118. Because the trusts never became holders of these mortgages, Defendants lacked
authority to collect or foreclose on their behalf and never should have represented they could.
119. While the course of unlawful conduct described in this Complaint began with
CWC, as successor in interest to CWC, SAC is liable for its violations of Nevada law. (The
instant Complaint does not seek to address the CWC legacy violations, only SAC's additional
conduct post acquisition.) After acquiring CWC, BAe engaged in new, repeated. and systemic
violations of Nevada law for which the State seeks to hold it responsible.
120. Defendants' deceptive practices have resulted in an explosion of delinquencies
and unauthorized and unnecessary foreclosures in the State of Nevada. These foreclosures have
had a devastating impact on Nevada's homeowners, communities, and economy, stripping
homeowners of their assets (including those who do not have loans originated or serviced by
Defendants, but whose property values have fallen dramatically), dislocating families, blighting
neighborhoods, and deeply disrupting the State's housing market.
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121. Soon after BAC acquired CWC, it negotiated, on CWC's behalf, a multi-state
settlement of charges that CWC had engaged in widespread consumer fraud in its origination,
marketing, and servicing practices. The State of Nevada resolved its claims by entering into the
Consent Judgment with CWC on February 24, 2009. On December 17, 2010, the State of
Nevada filed the instant action against BAC and its subsidiaries alleging violations of the DTPA
for their deceptive loss mitigation and foreclosure practices. On January 19, 2011, Nevada
amended its complaint to include violations of the Consent Judgment.
122. As the Nevada commenced discovery, it found in BAC's policies and procedures
practices that constituted additional, serious violations of the Consent Judgment, including
requirements that borrowers submit full applications for modifications under the Consent
Judgment, despite its promise of "streamlined" modifications. There was also evidence that
BAC's subsidiaries increased the interest rate (and payments) of some borrowers who received
modifications under the Consent Judgment, despite its promise that modifications would
decrease borrowers' interest rate. The State notified BAC's subsidiaries of these additional
grounds of breach by letter on June 1, 2011, but the violations have neither been corrected nor
satisfactorilyexplained.
123. Based on the provision of the Consent Judgment, Nevada seeks to terminate the
Consent Judgment on the grounds provided that BAC has materially failed to live up to its
obligations thereunder.
a. BAC's Nevada Directed Deceptive LossMitigation And Foreclosure Practices
124. As alleged in the Nevada Complaint, BAC has violated the Nevada DTPA by
misleading consumers in connection with BAC's loss mitigation and foreclosure programs.
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BAC has engaged, and continues to engage, in a pattern and practice of misleading consumers
about its mortgage modification program.
1. Misrepresentation of the Time
for Deciding Consumers' Modifications
125. On its website, in form letters, and in its interactions with individual consumers,
BAC repeatedly promised consumers answers on their modification requests within a specific
time frame, typically 30 or 60 days. Many consumers have waited six months or even a year and
still have not received decisions.
126. BAC's website indicates that it will "typically" take 30 to 45 calendar days from
the receipt of a consumer's documents to make a decision on a loan modification request. In
addition, BAC promises on its website that: "You can expect to hear back from us within 10
business days from when we receive all your required documents. The purpose of contacting
you is to confirm receipt of your information, as well as let you know how the evaluation process
works and how long it takes.II
127. BAC sent consumers seeking modifications a document with "Frequently Asked
Questions." One question asks how long it will take for BAC to process consumers'
modification request. The answer: "up to 45 days."
128. These assurances are reinforced in one-on-one conversations between Nevada
consumers and BAC representatives, attested to by consumers and notes in consumers' servicing
files, in which BAC promises that consumers will have an answer on their requests within 30,
60, or 90 days. Despite its representations, BAC keptNevada consumers waiting for six months,
one year, or longer for decisions. These homeowners have suffered delay, anxiety, and often
foreclosure while trying to secure an affordable payment that allows them to meet their
obligations and keep their homes.
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129. One critical source of delay is BAC's routine loss of consumer documents. BAC
consistently has lost consumers' documents; causing delays while consumers re-sent, sometimes
more than half a dozen times-the same documents. Consumers were deceptively denied
modifications because of "missing" paperwork that BAC actually received.
130. BAC has routinely failed to notify consumers of missing documents. Many
homeowners found out that their documents were missing or incomplete months after they
submitted their modification requests, and only upon calling BAC. In many instances, BAC told
consumers that documents were missing after previously assuring them, often repeatedly, that
their files were complete and under review.
131. While waiting for answers, consumers called BAC regularly to check on the
status of their modification requests. They were promised calls or letters with updates, which
almost never came, or decisions by a specific date or within a set number of days. Instead, many
received multiple foreclosure-related communications, including collection calls. This long
waiting period is not only inconsistent with BAC's oral and written commitments to consumers,
but extremely trying for homeowners who do not know from day to day whether they will get
help or lose their homes. BAC knew, or should have known, that its statements were false
because its employees were aware that consumers often suffer delays of more than three months
while waiting for action on their modification requests.
2. BAC Misrepresented to Nevada Homeowners that theirTrial Modifications would be Converted to PermanentModifications if they made their Trial Payments.
132. Pursuant to the Home Affordable Loan Modification Program ("HAMP"). a two
tier framework was created. Borrowers first must qualify for an initial, three-month trial
modification. Homeowners who make each of the three payments on time will receive
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permanent modifications. BAC made unequivocal promises that homeowners who successfully
completed trial modification would receive permanent modifications. In that regard, the BAC
website represented:
a. "If you successfully make all your Trial Period Plan payments, you will
receive a Modification Agreement defining the changes. After this document has been signed,
notarized and returned to us, your modification will be officially made permanent."; and
b. "If you successfully make your Trial Period Plan payments during the trial
period, you will be approved for a permanent modification of your loan."
133. BAC also led homeowners to believe that it would convert them to permanent
modifications after three or four months of a trial period. Homeowners received three payment
coupons with their modification agreement, and report being confused about what to do when
they reached the fourth month but have not heard from BAC. Some homeowners called BAC
and were told at that time, or were told at the time the trial modification was offered, that they
would receive a permanent modification within a month of completing their trial period.
134. BAC's website again confirmed its oral representations: "Your trial period will
last 3 or 4 months, depending on your circumstances." BAC did not advise consumers that they
would wait six months or more. BAC's trial modification offer assured homeowners, "If you
make all of your trial period plan payments and return any additional documents that may be
required, you may receive a Modification Agreement." One Nevada homeowner made six
payments on his first trial modification. He then received documents for a different loan
modification. When he called BAC for an explanation, he was told that he would have to restart
the modification process and complete another trial period before receiving a permanent
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modification. After he made those payments, the same homeowner received yet another trial
modification with different terms.
135. SAC knew, or should have known, that its promises that it would make decisions
on permanent modifications within a month of completing their trial modifications was
deceptive. SAC tracked the "age" of trial periods, and knew that many consumers waited more
than four (or even six or nine) months for their modifications to be made permanent (or
declined).
136. Although homeowners benefit from temporarily lower payments during their trial
modification, consumers who are not converted to a permanent modification may end up worse
off. In his most recent report, the Inspector General of the Troubled Assets Relief Program,
which oversees HAMP, discussed the fate of borrowers in failed trial modifications who "even in
circumstances where they never missed a payment, ... may face back payments, penalties, and
even late fees that suddenly become due on their modified' mortgages and that they are unable to
pay, thus resulting in the very loss of their homes that HAMP ismeant to prevent."
3. Foreclosures of Nevada Homeswhile Modifications were Pending
137. Homeowners waiting for decisions on their modifications often received
foreclosure-related notices from SAC. Upon receiving these communications, many consumers
called the number provided by SAC on the notices to find out what they mean. SAC repeatedly
and deceptively assured Nevada consumers that they should not worry, their modifications are
still in review, and their homes will not be sold while their modification requests were pending.
138. This promise was reinforced by commitments on SAC's website. Under
"Frequently Asked Questions," SAC represented to homeowners that their homes would not be
sold while they were awaiting decisions on their modification requests or on modification plans.
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Despite such assurances, Bank BAC has pursued or completed foreclosures while homeowners
were awaiting decisions upon loan modifications. In some cases, homeowners incurred
foreclosure fees even though the foreclosure process should never have started or proceeded.
BAC knew or should have known that its statements were false and misleading. Its employees
regularly encountered consumers whose homes were wrongfully foreclosed while their
modifications were still under review. Interviews with former BAC call center employees
indicate that foreclosures while consumers were awaiting decisions on their modifications were
common.
4. Reporting to Credit Agencies
139. In addition, BAC notified credit agencies that homeowners were in default when
they were not. BAC indicated on its website that consumers in trial modifications would be
reported to the credit agencies because they are not making their full, original mortgage payment.
However, BAC does not disclose that even consumers making full payments may be the subject
of negative reporting. One Las Vegas homeowner, who suffered a heart attack that caused him
to incur substantial medical expenses and a loss in his income, applied to BAC for a modification
even though he was current on his mortgage payments. He continued to pay both his first and
second mortgages with BAC in full while he waited for a decision on his request. However, for
six months, BAC reported to credit agencies that he was delinquent on his loans. Despite being
current, he also received a Notice of Intent to Accelerate. Such false credit reports make it
harder and more expensive for consumers to obtain credit. In addition, misrepresenting the
delinquency status of consumers' loans allows BAC to impose late fees and other charges to
which it is not entitled and which make it even harder for a consumer to remain or become
current on their mortgages. Nevada alleges that such misrepresentations about the consumer's
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payment status violate the Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C. §§
1692e(2)(A) & (8), and, as a result, the DTPA. Nev. Rev. Stat. § 598.0923(3).
5. Eligibility for and Denials of Modifications
140. BAC represents publicly, and federal rules require, that consumers need not be
delinquent to be eligible for a modification. BAC's Website notes: "Ifyou've suffered a hardship
that is affecting your ability to make your mortgage payments or have already missed a payment,
you may be able to receive a more affordable mortgage payment under the Home Affordable
Modification Program. II Yet BAC's representatives frequently advised consumers that they must
miss payments in order to be considered for loan modifications. BAC told consumers, by letter
and often by phone, the reasons that their requests for modifications were denied. Among the
commonly cited reasons for denying Nevada consumers' applications were: the claims that the
owner of the loan with authority to approve the modification would not permit the modification;
the inability to reach the consumer or to obtain missing documents needed to review the request;
a previous modification; the consumer's income was insufficient to support the modified
payment; the failure to make payments or to accept previous modification; and the homeowner
was current on his mortgage payments.
141. In cases reviewed by Nevada the Attorney General's Office, the reasons offered
by BAC for denying modifications were inaccurate and misleading. BAC told consumers that it
had denied their modifications because it was unable to reach them. However, the borrowers
regularly called BAC to obtain updates on their status and/or resubmit their documents. In
addition, none of these consumers reported ever receiving calls from BAC but, instead, noted
that they were unable to reach their assigned contacts, even after multiple attempts. In other
cases, BAC claimed that it was missing documents, even though consumers had repeatedly sent
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in their documents and/or were told by BAC that their files were complete and being reviewed
for modifications. BAC's authority to offer modifications is defined by the Pooling and
Servicing Agreement ("PSA") that governs the servicing of specific pools of loans. In some
instances, the investor or owner of the loans delegates to BAC full authority to make
modification decisions consistent with the investor's best interest. Under some PSA's, only
certain types of loans can be modified or certain types of modifications made. Other investors do
not permit modifications or require BAC to seek approval before offering modifications.
142. BAC notified consumers that their modifications were declined by the investors in
instances where BAC had full authority, without the investors' approval, to offer modifications.
In other cases, BAC denied a loan modification, claiming that a consumer previously received a
modification when the consumer had instead rejected a modification based on inaccurate income
figures. BAC rejected other modifications for the stated reason that the consumer had failed to
make her payments during a three month trial modification when, in fact, the consumer had
made (and BAC had cashed) all of her payments.
6. Changing the Terms of Modifications,Failing to Deliver Promised Modfflcations,or Ignoring or Repudiating Existing Modifications.
143. For consumers who were able to secure modification commitments, BAC
misrepresented whether and on what terms their modification requests had been approved. BAC
told consumers that their modifications had been approved, but then notified them that they had
never received modifications. Often, this news came only after consumers had made several
payments.
144. Nev. Rev. Stat. § 107.086, passed by the Nevada Legislature on May 22, 2009,
allows homeowners who receive Notices of Default to participate in a pre-foreclosure mediation
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with their servicers. See Nev, Rev. Stat. § 107.086(2)(a)(3) (requiring a trustee to send with
every Notice of Default a form where the homeowner "may indicate an election to enter into
mediation"). Ifa homeowner sends in the required election form, the servicer must appear at an
assigned mediation date with all required documents and the authority to negotiate an
appropriate agreement with the borrower. Nev. Rev. Stat. § 5 107.086(4) (requiring the servicer
to bring "the deed of trust, the mortgage note and each assignment of the deed of trust or
mortgage note" and "have authority to negotiate a loan modification"). Participation in good
faith in the mediation is prerequisite to moving forward with the foreclosure. Nev. Rev. Stat. §
8107.086(2)(c)(2) (requiring a certification under Nev. Rev. Stat. § 107.086(7), which requires
the parties act in "good faith"). BAC representatives repeatedly failed to appear at assigned
mediation dates or did not have the documents or negotiating authority required by law. As a
result, in a number of instances, mediators issued findings that BAC acted in bad faith.
145. A number of consumers were promised modifications on a set of terms worked
out with (and witnessed by) the mediators. In one case, BAC offered a modification at mediation
and promised to send the consumer an agreement reflecting its terms. BAC did not provide the
consumer the promised modification agreement. When BAC, after repeated calls, finally
provided the agreement, its terms were materially different than those offered at the mediation.
For example, BAC told one recently widowed, elderly Las Vegas homeowner at her mediation
that she was approved for a trial modification and promised to send her the modification
agreement in two to four weeks. The homeowner never received the documents. When she
called BAC to follow up, the representative said her file was still being reviewed and told her to
send in updated financial information. She submitted the documents and kept calling. On one
call, a BAC representative suggested she re-start the application process. BAC also explained
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that an employee had failed to enter the results of the mediation into her account. The
homeowner received multiple foreclosure notices. InJune 2010, BAC offered the homeowner a
permanent modification increasing her payments to more than half her income. She accepted the
modification despite the financial strain because, as she explained, "my nerves, my blood
pressure, my state of mind could not stand another 3 months, 6 months, or however long it would
have taken of living in fear of thinking this might be the day or the week I lose my home."
146. BAC provided modifications to consumers and then either attempted to revoke
such modifications or failed to honor their terms. For example, though consumers signed
modification agreements, BAC failed to implement their terms and continued to seek to collect
the original, unmodified payments. BAC's promises of modifications that it failed to provide or
refused to honor constitute a deceptive practice.
147. Nevada seeks fines, restitution and a declaration that the Consent Judgment is
vacated.
G. HAC Engages in Termination of Employee
Who Investigated Mortgage Wrongdoing
148. On September 14, 2011 the United States Department of Labor announced that it
had found that BAC had violated the whistleblower protection provisions of the
Sarbanes-Oxley Act.
149. It was reported that the U.S. Department of Labor's Occupational Safety and
Health Administration has found Charlotte, N.C.-based Bank of America Corp. in violation of
the whistleblower protection provisions of the Sarbanes-Oxley Act for improperly firing an
employee. BAC has been ordered to reinstate and pay the employee approximately $930,000,
which includes back wages, interest, compensatory damages and attorney fees. The findings
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follow an investigation by OSHA's San Francisco Regional Office, which was initiated after
receiving a complaint from the Los Angeles-area employee.
150. "It's clear from our investigation that Bank of America used illegal retaliatory
tactics against this employee," said OSHA Assistant Secretary Dr. David Michaels. "This
employee showed great courage reporting potential fraud and standing up for the rights of other
employees to do the same."
151. It was reported that the employee originally worked for CWC which merged with
BAC in July 2008. The employee led internal investigations that revealed widespread and
pervasive wire, mail and bank fraud involving CWC employees. The employee alleged that
those who attempted to report fraud to CWC's Employee Relations Department suffered
persistent retaliation. The employee was fired shortly after the merger.
152. "Whistleblowers playa vital role in ensuring the integrity of our financial system,
as well as the safety of our food, air, water, workplaces and transportation systems," added
Michaels. "This case highlights the importance of defending employees against retaliation when
they try to protect the public from the consequencesof an employer's illegal activities."
153. Thus, rather than take the allegations of wrongdoing to heart and fixing what was
wrong, BAC continued on its course to sweep the wrongdoing under the rug and failed to come
clean. BAC has announced that it refused to accept the decision and will appeal.
DERIVATIVE ALLEGAT IONS
154. Plaintiff brings this action as a derivative action pursuant to Federal Rules of Civil
Procedure 23.1 on behalf of and for the benefit of BAC.
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155. Plaintiff will fairly and adequately represent the interests ofBAC in enforcing and
prosecuting its rights, and has retained competent counsel experienced in this type of litigation to
prosecute this action.
DEMAND IS EXCUSED FOR FUTILITY
156. Demand on BAC bring this action has not been made and is not necessary
because such demand would be futile. The BAC Board at the time suit was filed consisted of the
following twelve Directors: Charles O. Holliday, Jr., Mukesh D. Ambani, Susan S. Bies, Frank
P. Bramble,Sr., Virgis W. Colbert, Charles K. Gifford,D. Paul Jones, Jr., Monica C. Lozano,
Thomas 1. May, Brian T. Moynihan, Donald E. Powell, Charles O. Rossotti, and Robert W.
Scully.
157. Plaintiff did not make any demand on the BAC Board to institute this action
because such a demand would have been a futile and useless act, particularly for the reasons
listed below.
158. Since the acquisition of CWC, BAC and its Board have known, as a result of the
very extensive due diligence, that BAC had assumed extraordinary potential liabilities. Rather
than working to resolve these liabilities and ameliorate them, the BAC Board created new ones
by permitted management to engage in the continued wrongdoing set forth herein, including the
Robo-Signing of foreclosure documents, refusal to cooperate with federal investigators, possible
violations of the False Claims Act and more. The BAC Board was aware of this wrongful
conduct as it was known as a result of very wide publicity as to the issues involving the mortgage
meltdown and the foreclosure mess. As a result, the Board, being complicit in the conduct
engaged in by BAC and exposed to the substantial likelihood of personal liability cannot now
fairly assess the propriety of a pre-suit demand, challenging that very conduct. There is more
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than reasonable doubt as to whether the BAC board could exercise independent business
judgment to allow this suit to go forward under these circumstances.
159. The Board is also disabled to act as it is directing the defense of litigation
involving the same allegations, as set forth herein, and cannot independently consider bringing
suit thereon.
COUNT I(For Violation of §10(b) of the 1934Act and Rule 10b-5
Against the Class Action Individual Defendants)
160. During the Class Period, the Class Action Individual Defendants disseminated or
approved the false statements specified above, which they knew or deliberately disregarded were
misleading in that they contained misrepresentations and failed to disclose material facts
necessary in order to make the statements made, in light of the circumstances under which they
were made, not misleading.
161. Defendants violated § 1O(b) of the 1934 Act and Rule 10b-5 in that they:
(a) employed devices, schemes and artifices to defraud;
(b) made untrue statements of material facts or omitted to state material facts
necessary in order to make the statements made, in light of the circumstances under which they
were made, not misleading; or
(c) engaged in acts, practices and a course of business that operated as a fraud
or deceit upon plaintiff and others similarly situated in connection with their purchases of BAC
common stock during the Class Period.
162. Class Plaintiff and the Class have suffered damages in that, in reliance on the
integrity of the market, they paid artificially inflated prices for BAC common stock. Plaintiff and
the Class would not have purchased BAC common stock at the price they paid, or at all, if they
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had been aware that the market price had been artificially and falsely inflated by defendants'
misleading statements.
163. If BAC is liable to the Class in the Class action securities Action, then the Class
Action Individual Defendants are liable to the Company for contribution.
SECOND CAUSE OF ACTION
(Against the Class Action Individual Defendants for Breach of Fiduciary Duty)
164. Plaintiff incorporates by reference and real leges each and every allegation
contained above, as though fully set forth herein.
165. The Class Action Individual Defendants owed and owe BAC fiduciary
obligations. By reason of their fiduciary relationships, the Class Action Individual Defendants
owed and owe BAC the highest obligations of good faith, fair dealing, loyalty and due care.
166. These Defendants breached their fiduciary duties of care, loyalty, reasonable
inquiry, oversight, good faith and supervision.
167. Each of the Class Action Individual Defendants had actual or constructive
knowledge that they had caused BAC to improperly misrepresent the business and prospects of
the Company. These actions could not have been a good faith exercise of prudent business
judgment. Moreover, certain of the Class Action Individual Defendants are asserted to have
engaged in the actions alleged in the Class Action, which would be a breach of their duty to
conduct the business of the Company only through lawful and proper means.
168. As a direct and proximate result of the Class Action Individual Defendants'
misconduct, BAC has suffered and will continue to suffer significant damages. As a result of the
misconduct alleged herein, these Individual Defendants are liable to the Company.
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THIRD CAUSE OF ACTION
(Against The Class Action Individual Defendants for Breach of the Duty
of Full Disclosure and Complete Candor)
169. Plaintiff incorporates by reference all previous allegations.
170. Whenever directors communicate publicly or directly with shareholders about the
corporation's affairs, with or without a request for shareholder action, directors have a fiduciary
duty to shareholders to exercise due care, good faith and loyalty. When directors communicate
publicly or directly with shareholders about corporate matters the sine qua non of directors'
fiduciary duty to shareholders is honesty. Moreover, a fiduciary who learns that her earlier
communications to her beneficiaries were false and nonetheless knowingly and in bad faith
remains silent even as the beneficiaries continue to rely on those earlier statements also breaches
his duty of loyalty and of full and fair disclosure.
171. Each of the Class Action Individual Defendants has breached his/her duty of full
disclosure and complete candor by knowingly and/or recklessly disregarding the falsity and
misleading nature of the information which they caused it to be disseminated to the investing
public.
172. In addition to the duties of full disclosure imposed on the Class Action Individual
Defendants as a result of their making affirmative statements and reports, or participation in the
making of affirmative statements and reports to the investing public, they each had a duty to
disseminate truthful information promptly that would be material to investors in compliance with
the integrated disclosure provisions of the SEC regulations, including accurate and truthful
information with respect to the Company's business, so that the market prices of the Company's
publicly traded securities would be based on truthful, complete and accurate information.
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173. As a direct and proximate result of the Class Action Individual Defendants'
breach of full disclosure and complete candor, BAC has sustained significant damages arising
out of the alleged material misstatements to the investing public, and these Individual Defendants
are liable to the Company.
FOURTH CAUSE OF ACTION
(Against the BAC Director Defendantsfor Breach of Fiduciary Duty)
174. Plaintiff incorporates by reference and realleges each and every allegation set
forth above as though fully set forth herein.
175. The BAC Director Defendants owed and owe BAC fiduciary obligations. By
reason of their fiduciary relationships, the Individual Defendants owed and owe BAC the highest
obligations of good faith, fair dealing, loyalty and due care.
176. Based on their failure to properly act, these Defendants breached their fiduciary
duties of care, loyalty, reasonable inquiry, oversight, good faith and supervision.
177. Each of these Defendants had actual or constructive knowledge that they had
caused BAC to engage in wrongful conduct, and their decisions or non-decisions could not have
been a good faith exercise of prudent business judgment.
178. As a direct and proximate result of the Individual Defendants' misconduct, BAC
has suffered and will continue to suffer significant damages. As a result of the misconduct
alleged herein, these Individual Defendants are liable to the Company.
JURY DEMAND
179. Plaintiff demands a trial by jury.
PRAYER FOR RELIEF
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WHEREFORE, plaintiff prays for judgment as follows:
A. Against the Class Action Individual Defendants for contribution pursuant to
Sections IO(b) and 2I(D) of the Exchange Act;
B . Against all of the BAC Director Defendants for the damages sustained by BAC as
a result of the breaches of fiduciary duty, as set forth herein;
C. Equitable and/or injunctive relief as permitted by law;
D. Restitution and disgorgement of unjust enrichment;
E. Attorneys' fees and costs; and
F. Any such other and further relief as may be just and proper.
Dated: New York, New York
September 26, 2011
ROYJA.~~~.,;~~~~--
By: (A member of
the B IS CORoy L. Jacobs
60 East 42nd Street
46th Floor
New York, New York 10165
Telephone: (212) 867-1156
Facsimile: (212) 504-8343
PASKOWITZ &ASSOCIATES
Laurence D. Paskowitz (A member of the Bar of
this Court)
60 East 42nd Street
46th Floor
New York, New York 10165
Telephone: (212) 685-0969
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. .
Facsimile: (212) 685-2306
A ttorneys for R oy L. Jaco bs a nd
R o y J ac ob s &Associates
A tto rn ey s fo r P la in tiff
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VERIFICATION
Richard Delman, under pain and penalty of perjury under the laws of the United States,
avers that as plaintiff herein he verifies that he has reviewed. the foregoing Verified
Shareholder's Derivative Complaint, and that the allegations are true and correct to the best of
his information, knowledge and belief.