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Case 1:09-cv-00808-PKC Document 1 Filed 01/28/09 Page 1 of 133

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK












LOUISIANA MUNICIPAL POLICE EMPLOYEES
RETIREMENT SYSTEM, Derivatively on Behalf of
BANK OF AMERICA CORPORATION,

Plaintiff,

v.

KENNETH D. LEWIS, CHARLES K. GIFFORD,
WILLIAM BARNET, III, FRANK P. BRAMBLE,
SR., JOHN T. COLLINS, GARY L. COUNTRY-
MAN, TOMMY R. FRANKS, MONICA C.
LOZANO, WALTER E. MASSEY, THOMAS J.
MAY, PATRICIA E. MITCHELL, THOMAS M.
RYAN, O. TEMPLE SLOAN, MEREDITH R.
SPANGLER, ROBERT L. TILLMAN, JACKIE M.
WARD,
JOE L. PRICE, AMY WOODS
BRINKLEY, BRIAN T. MOYNIHAN, R. EUGENE
TAYLOR, NEIL A. COTTY, KEITH T. BANKS,
JOHN A. THAIN, CAROL T. CHRIST,
ARMANDO M. CODINA, JUDITH MAYHEW
JONAS, VIRGIS W. COLBERT, AULANA L.
PETERS, CHARLES O. ROSSOTTI, JOHN D.
FINNEGAN, JOSEPH W. PRUEHER, ANN N.
REESE, NELSON CHAI, THOMAS K. MONTAG,
DELOITTE & TOUCHE LLP, FOX-PITT KELTON
COCHRAN CARONIA WALLER (USA) LLC, and
J.C. FLOWERS & CO. LLC,

Defendants,

and

BANK OF AMERICA CORPORATION,

Nominal Defendant.

No. 09-cv-808 (UA)


AIDING

BREACH

SHAREHOLDER
VERIFIED
DERIVATIVE
COMPLAINT
FOR BREACH OF FIDUCIARY
AND
DUTIES,
ABETTING
OF
FIDUCIARY DUTIES, UNJUST
ENRICHMENT,
CONTRI-
BUTION, AND VIOLATIONS
OF SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT
OF 1934


JURY TRIAL DEMANDED







Case 1:09-cv-00808-PKC Document 1 Filed 01/28/09 Page 2 of 133

VERIFIED SHAREHOLDER DERIVATIVE COMPLAINT

Plaintiff, by its undersigned attorneys, submits this Verified Shareholder Derivative

Complaint (“Complaint”) in the name and on behalf of nominal defendant Bank of America

Corporation (“BOA” or the “Parent”) against certain directors and officers of BOA named herein

(the “BOA Defendants”) and other defendants (collectively, “Defendants”). Plaintiffs base their

allegations on actual knowledge as to their own acts and on information and belief as to all other

allegations after due investigation.

INTRODUCTION

1.

This action arises from the BOA Defendants’ misconduct in manipulating the

market for auction rate securities (“ARS”), leading to billions of dollars in losses and liabilities at the

company. In addition, the action seeks relief for all Defendants’ wrongdoing in causing BOA to

acquire Merrill Lynch & Co., Inc. (“Merrill”) in a merger transaction announced on September 15,

2008 and consummated on January 1, 2009 (the “Merger”) that will cause untold billions more in

losses and liabilities to BOA. The Merger was undertaken through a breach of the BOA Defendants’

fiduciary duties to the company and its shareholders, aided and abetted by certain officers and

directors of Merrill (the “Merrill Defendants”). The Merger was consummated through a false a

misleading proxy statement issued by the Board of Directors of BOA (the “BOA Director

Defendants”) and others.

2.

BOA 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. The

company depends for its success on the identity of its brand – and its reputation for honesty and

integrity.



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The ARS Scam

3.

Today, through the misconduct of the BOA Defendants, BOA’s reputation lies in

tatters, and its future as a going concern is highly questionable. The BOA Defendants – as well as

their counterparts at approximately one dozen other brokerage houses, including Citigroup, UBS,

and Morgan Stanley – participated in an industry-wide scheme in the ARS market whereby retail and

institutional customers alike were induce to purchase tens of billions of dollars’ worth of highly

illiquid and unmarketable securities. The scam will take years to recover from and cost BOA alone

upwards of one billion dollars in fines, remediations, judgments, settlements, repurchases from

customers, lost business, and other repercussions.

4.



Among the ways in which the BOA Defendants carried out the scheme were:

(a) Deceptively marketing ARS to customers as highly liquid cash alternatives

when, in fact, the ARS market in 2007 had become anything but liquid;



(b) Failing to disclose that, starting in 2007, the ARS market was only “liquid” to

the extent that these defendants caused or allowed the company to create an artificial market

for ARS;



(c)

Failing to implement or maintain adequate internal controls to ensure that

BOA’s transactions in ARS were legal, honest, and fair to customers;



(d)

Co-opting the company’s own supposedly independent research department

into the cause of selling illiquid ARS to unsuspecting customers, employing various

practices of undue influence that violated federal law, industry standards, and the company’s

own policies and procedures; and

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(e)

Abruptly abandoning the ARS market in February 2008 after promising

investors and the public to support it, leaving those investors stranded with illiquid and

unmarketable securities;

5.

As a result of these defendants’ misconduct, BOA became a target of an

administrative proceeding relating to ARS by the Securities and Exchange Commission (“SEC”) in

2006 – and again in 2008, for the same misconduct. The company was investigated by the

Massachusetts Securities Division and the New York Office of Attorney General, as well as a nine-

state task force, comprising Florida, Georgia, Illinois, Missouri, New Hampshire, New Jersey, North

Carolina, Texas and Washington, led by the Financial Industry Regulatory Authority and the North

American Securities Administrators Association. In addition, the company has been sued for

violations of the federal securities laws arising out of the ARS scheme

6.

To head off those proceedings, the BOA Defendants agreed to several onerous

settlements, including settlements in August and September 2008 that required BOA to pay a fine of

$50,000,000 and repurchase approximately $5 billion worth of ARS from customers. The ARS that

BOA has acquired and will acquire from its customers in this way are substantially unmarketable

and will require the company to book losses in the hundreds of millions, or billions, of dollars.

The Citigroup Complaint

7.

The SEC recently filed a civil complaint against another participant in the ARS

market manipulation scheme, Citigroup Global Markets, Inc. (“Citigroup”). The complaint against

Citigroup was filed simultaneously with the SEC’s announcement that a settlement with Citigroup

was now finalized. The SEC had reached a preliminary settlement with Citigroup in the late summer

of 2008, just as it had with BOA. (A copy of the SEC complaint is attached hereto as Exhibit A.)

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8.

The complaint in the SEC civil action against Citigroup is based on misconduct

similar or identical to that alleged here of the BOA Defendants in the ARS market. See Exhibit A.

Specifically, the SEC alleges that Citigroup knowingly concealed from its customers the growing

illiquidity in the ARS market while simultaneously assuring them that ARS were safe and liquid

investments. See Exhibit A, ¶¶ 20-72. Moreover, the SEC complaint alleges that no later than

August 2007, as credit markets deteriorated, the true facts concerning the ARS market were made

unmistakably clear to senior management. See id. ¶¶ 32-34. Finally, the SEC alleges that Citigroup

nonetheless instructed its brokers to sell as much ARS inventory as possible, which would leave

customers holding billions in illiquid securities. See id. ¶¶ 40-54.

9.

The SEC complaint against Citigroup, with its identical allegations of misconduct to

those here against the BOA Defendants, confirms why the misconduct at issue herein was not in any

sense a new violation of the securities laws but was merely a resumption and exacerbation of the

same pattern of misconduct that had led the SEC to fine and censure BOA in 2006. See Exhibit A.

Indeed, the SEC made clear in the Citigroup complaint that, among other things, although Citigroup

had duly “posted its ARS practices on its website” pursuant to the 2006 settlement, “these

disclosures were inadequate and did not negate Citi’s marketing of ARS as liquid investments that

were an alternative to money market instruments.” Id. ¶ 20. The BOA Defendants, who agreed to

the same settlement with the SEC in 2006, followed the exact same path afterward, as alleged herein.

BOA Agrees to Buy Merrill Sight Unseen

10.

Merrill, for its part in the ARS scheme, entered into similar settlements with the

SEC and state regulators, requiring Merrill to pay a fine of $125,000,000 and repurchase

approximately $12 billion of ARS. Shortly after entering into its ARS settlements, Merrill’s

liquidity problems, already serious, took an alarming turn for the worse, making clear that it could

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not continue as a going concern. The Board of Directors of Merrill and others at Merrill (sued here

as the Merrill Defendants) were forced to sell the entire company to an outside party – which

transaction these defendants accomplished on the weekend of September 13-14, 2008. Thus was

Merrill acquired by BOA in a stock-for-stock Merger announced on the morning of September 15,

2008. The deal was negotiated in the space of a single afternoon, Saturday, September 13, 2008,

between defendant Kenneth A. Lewis, BOA’s Chairman and CEO, and defendant John A. Thain, the

Chairman and CEO of Merrill. The deal was valued at the time at approximately $50 billion,

representing a 70 percent premium to the price of Merrill’s common stock at the time. The Boards

of Directors of both Merrill and BOA approved the Merger in great haste in separate afternoon

meetings held the next day.

11.

The approval of the Merger by the BOA Director Defendants constituted a flagrant

breach of the Board members’ fiduciary duties to BOA. In agreeing to buy Merrill, the BOA

Director Defendants were searching for a way to rectify the disaster that had been visited upon the

company by the BOA Defendants in the ARS scheme. Indeed, with the revenue pipeline from ARS

and other derivative securities – which had represented a substantial percentage of BOA’s revenues

and profits in recent years – now transformed into outright liabilities, the BOA Director Defendants,

led by Chairman Lewis, sought merger partners in an attempt to “buy their way out” of the problem

– i.e., acquire purportedly profitable businesses, integrate them as subsidiaries, and use them to

bolster the Parent’s earnings.

12.

However, the process by which the BOA Director Defendants agreed to buy Merrill

– and eventually close the deal on January 1, 2009 – was gravely flawed, from start to finish.

13.

First, the BOA Board conducted almost no due diligence of Merrill. According to

the BOA Director Defendants’ own statements to shareholders, the due diligence they made of

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Merrill began no earlier than the late afternoon of Saturday, September 13, 2008, and was essentially

concluded by early the next morning. Such an investigation, occupying as it did no more than 12 to

15 hours of analysis, was, on its face, woefully incomplete and inadequate for a proposed $50 billion

merger. The process was especially inadequate given Merrill’s exposure to metastasizing losses in

the market for ARS, collateralized debt obligations, mortgage-backed securities, and other

derivatives that made headlines throughout the nation’s economy in the summer and fall of 2008.

14.

Nowhere is this better illustrated than in the BOA Director Defendants’ agreement to

indemnify the officers and directors of Merrill (including the Merrill Defendants herein) for all

liabilities arising before the Merger was to be consummated. Pursuant to its terms, the Merger

agreement required BOA to indemnify and exculpate all directors and officers of Merrill to the

fullest extent provided by law, and it precluded BOA from amending, repealing, or in any way

diminishing these indemnification and exculpation provisions for at least six years following the

Merger. This provision had the effect of completely transferring liability for all the Merrill

Defendants’ misconduct onto BOA, including liability for claims arising from the Merrill

Defendants’ own misconduct in the ARS market.

15.

In agreeing to these terms, the BOA Director Defendants did not consider the scope,

potential amount, or any other aspect of the liabilities that they were causing BOA to assume –

including whether the assumption of such liabilities might cause serious or even fatal harm to BOA.

The assumption of such liabilities without quantification or other consideration constituted a breach

of these defendants’ duties to BOA, since the decision to do so could not have been taken in good

faith or as the result of those defendants’ informed business judgment. Through the BOA Director

Defendants’ misfeasance, BOA unwittingly inherited billions of dollars in losses and liabilities,

eroding whatever value that Merrill had to BOA in the first place – and, once again, severely

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jeopardizing BOA’s ability to continue as a going concern. Indeed, in a move which dismayed

everyone but surprised no one, on or about January 16, 2009, BOA was forced to obtain an

additional $20 billion in aid from the federal government (on top of approximately $25 billion in aid

received in the fall of 2008), just to stay afloat.

BOA Shareholders Get a False Picture of Merrill

16. Moreover, as became obvious practically the moment it closed on January 1, 2009,

the Merger was approved by BOA’s shareholders based on inaccurate and misleading information

furnished to them by certain of the Defendants. The BOA Director Defendants sought shareholder

consent to the Merger in a Schedule 14A Proxy Statement (the “Merger Proxy Statement”) issued

on November 3, 2008 – one month before the shareholder vote scheduled for December 5, 2008.

The Merger Proxy Statement contained statements concerning Merrill that were false and that

omitted information necessary to make the statements that were made not misleading. Among

other things, these defendants failed to disclose, either in the Merger Proxy Statement or

subsequently, the unprecedented, and rapidly accelerating, losses at Merrill caused by its exposure

to ARS and other derivative securities.

17.

That information, however, was at the BOA Director Defendants’ fingertips, as they

had obtained unfettered access to the entirety of Merrill’s financial and accounting records once the

Merger agreement was signed. Merrill’s exposure, totaling in the tens of billions of dollars, was

manifestly material to BOA shareholders in deciding how to vote on the Merger. By omitting to

disclose this information, either in the Merger Proxy Statement itself or in a corrective or updated

disclosure, and by choosing to emphasize the positive contribution Merrill would make to BOA, the

BOA Director Defendants caused the Merger Proxy Statement to be false and misleading. This

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violated Section 14(a) of the Securities Exchange Act of 1934 and Rule 14a-9 promulgated

thereunder.

BOA Obtains a Secret Bailout

18.

The shareholder vote to approve the acquisition of Merrill was held on December 5,

2008, with 82 percent of BOA shareholders voting in favor. Almost immediately after the votes

were tallied, the BOA Director Defendants went to the United States Government to ask for more

money – on top of the $25 billion BOA had already received – to enable BOA to complete the

Merger. Defendant Lewis, BOA’s chairman, was expressly warned by both Treasury Secretary

Henry Paulson and Federal Reserve Chairman Ben Bernanke not to try to back out of the Merger,

even if it meant conceding that BOA’s due diligence of Merrill had been faulty. Lewis’s mission

was successful, and the BOA Director Defendants secured a promise of $20 billion in direct

assistance to complete the Merger, as well as protections against $88.5 billion in additional

exposure from Merrill. These developments were not disclosed to BOA shareholders before it

closed on January 1, 2009.

19.

The BOA Director Defendants’ actions in determining that the Merger could not

close without federal assistance, secretly securing that assistance, yet withholding these facts from

shareholders while the Merger was still pending, constituted further breaches of these defendants’

fiduciary duties. If Merrill’s exposure precluded BOA from being able to consummate the

transaction, the BOA Director Defendants had a number of options by which they could have

discharged their duties to shareholders. One option was terminating the Merger under the “Material

Adverse Effect” provisions of the Merger agreement. Another option was renegotiating the terms

of the Merger, including the purchase price, with Merrill. Neither of these options was pursued,

nor were shareholders given any information concerning the issue. The BOA Director Defendants,

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with over $100 billion in federal assistance dangling before their eyes, simply decided “not to rock

the boat.”

20.

The cost to BOA from the BOA Director Defendants’ misconduct will be profound.

Between January 14, 2009, when news first surfaced that the BOA Director Defendants had sought

federal assistance to complete the Merger, and January 20, 2009, BOA’s stock price dropped by 50

percent in only three trading days. The market capitalization of BOA has fallen by approximately

$90 billion since the deal with Merrill was first announced. On January 16, 2009, BOA shocked the

market in announcing a fourth-quarter loss of $1.79 billion, $15.3 billion of which was attributable

to Merrill. Thain, who had briefly run Merrill as a division of BOA, was fired. Lewis has lost all

credibility with investors and is expected to resign or be forced out. The company will need tens of

billions of dollars in new capital infusions, and there is talk of nationalization. And BOA has still

not reached a final settlement with the SEC for the ARS debacle.

Theories of the Action

21.

Plaintiffs seek derivative relief on behalf of BOA against the BOA Defendants for

breach of fiduciary duty in manipulating the market for ARS at BOA; against the BOA Director

Defendants for their breach of fiduciary duties in agreeing to indemnify the Merrill Defendants in the

Merger; against the BOA Defendants’ breach of fiduciary duties in agreeing to the Merger without

adequate due diligence; against the BOA Defendants for their breach of fiduciary duties in

proceeding with the Merger well after it had become apparent that Merrill would cause severe losses

to BOA; and against the BOA Director Defendants, Price, the Merrill Defendants, and the Advisor

Defendants in issuing a false and misleading Merger Proxy Statement in connection with obtaining

shareholder approval of the Merger. In addition, Plaintiff seeks relief against the Merrill Defendants

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for aiding and abetting the BOA Director Defendants’ fiduciary breaches in connection with the

Merger.

22.

The action is based on the BOA Defendants’ wrongful conduct in the ARS market

during the period from January 1, 2007 to the present (the “Relevant Period”), and on all

Defendants’ misconduct in connection with the Merger.

JURISDICTION AND VENUE

23.

This Court has original jurisdiction over this action pursuant to 28 U.S.C. § 1331,

because of claims presenting federal questions arising under the Exchange Act, and pursuant to 28

U.S.C. § 1367(a) because all others claims are so related to claims presenting federal questions that

they form part of the same case or controversy. 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.

24.

The Court has personal jurisdiction over each of the Defendants 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 New York 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.

25.

Venue is proper in this District pursuant to 28 U.S.C. § 1391 because: (a) one or

more of the Defendants either resides in or maintains executive offices here; (b) a substantial portion

of the transactions and wrongs complained of herein occurred here; and (c) Defendants have

received substantial compensation and other transfers of money here by doing business here and

engaging in activities having an effect here.

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Plaintiff

THE PARTIES

26.

Plaintiff Retirement System is an institution providing retirement and other benefits

to municipal police personnel throughout the State of Louisiana. The Retirement system has been a

continuous owner of BOA stock throughout the Relevant Period and remains so today. The

Retirement System is an instrumentality of the State of Louisiana and a citizen thereof.

Nominal Defendant

27.

Nominal defendant BOA 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. BOA 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.

The BOA Defendants

28.

Defendant Kenneth D. Lewis (“Lewis”) is the Chairman, Chief Executive Officer

and President of BOA. He has been a director since 1999. He became Chief Executive Officer in

2001 and has served continuously in that position since that time. He became President in 2004 and

has served continuously in that position since that time. He became Chairman in 2005 and has

served continuously in that position since that time. He is also a member of the Executive

Committee of the Board. In exchange for his purported trust, loyalty, and fidelity to BOA, Lewis

was paid $24,844,040 in salaries, bonuses, fees, stock options, stock awards, and other compensation

in 2007. Lewis is a citizen of North Carolina.

29.

Defendant Charles K. Gifford (“Gifford”) has been a member of the Board since

2004, when Bank of America acquired FleetBoston, of which Gifford was CEO. He is a member of

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the Executive Committee of the Board and was the Chairman of the Board until replaced by Lewis.

In exchange for his purported trust, loyalty, and fidelity to BOA, Gifford was paid $1,383,648 in

salaries, bonuses, fees, stock options, stock awards, and other compensation in 2006, and 1,850,331

in 2007. Gifford is a citizen of North Carolina.

30.

Defendant William Barnet, III (“Barnet”) has been a member of the Board since

2004, when Bank of America acquired FleetBoston. He is a member of the Audit Committee of the

Board. In exchange for his purported trust, loyalty, and fidelity to BOA, Barnet was paid $397,847

in salaries, bonuses, fees, stock options, stock awards, and other compensation in 2006, and

$240,000 in 2007. Barnet is a citizen of South Carolina.

31.

Defendant Frank P. Bramble, Sr. (“Bramble”) has been a member of the Board since

2006, when BOA acquired MBNA. He is a member of the Asset Quality Committee of the Board.

In exchange for his purported trust, loyalty, and fidelity to BOA, Bramble was paid $324,861 in

salaries, bonuses, fees, stock options, stock awards, and other compensation in 2006, and $210,517

in 2007. Bramble is a citizen of Delaware.

32.

Defendant John T. Collins (“Collins”) has been a member of the Board since 2004,

when Bank of America acquired FleetBoston. He is a member of the Audit Committee of the Board.

In exchange for his purported trust, loyalty, and fidelity to BOA, Collins was paid $244,500 in

salaries, bonuses, fees, stock options, stock awards, and other compensation in 2006, and $240,000

in 2007. Collins is a citizen of Massachusetts.

33.

Defendant Gary L. Countryman (“Countryman”) has been a member of the Board

since 2004, when Bank of America acquired FleetBoston. He is a member of the Executive

Committee of the Board. In exchange for his purported trust, loyalty, and fidelity to BOA,

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Countryman was paid $403,145 in salaries, bonuses, fees, stock options, stock awards, and other

compensation in 2006, and $210,517 in 2007. Countryman is a citizen of Massachusetts.

34.

Defendant Tommy R. Franks (“Franks”) has been a member of the Board since

2006. He is a member of the Audit Committee of the Board. In exchange for his purported trust,

loyalty, and fidelity to BOA, Franks was paid $318,984 in salaries, bonuses, fees, stock options,

stock awards, and other compensation in 2006, and $210,517 in 2007. Franks is a citizen of

Oklahoma.

35.

Defendant Monica C. Lozano (“Lozano”) has been a member of the Board since

2006. She is a member of the Asset Quality Committee of the Board. In exchange for her purported

trust, loyalty, and fidelity to BOA, Lozano was paid $263,486 in salaries, bonuses, fees, stock

options, stock awards, and other compensation in 2006, and $210,517 in 2007. Lozano is a citizen

of California.

36.

Defendant Walter E. Massey (“Massey”) has been a member of the Board since

1998. He is a member of the Audit Committee of the Board. In exchange for his purported trust,

loyalty, and fidelity to BOA, Massey was paid $649,692 in salaries, bonuses, fees, stock options,

stock awards, and other compensation in 2006, and $210,517 in 2007. Massey is a citizen of

Georgia.

37.

Defendant Thomas J. May (“May”) has been a member of the Board since 2004,

when Bank of America acquired FleetBoston. He is the Chair of the Audit Committee of the Board.

In exchange for his purported trust, loyalty, and fidelity to BOA, May was paid $469,117 in salaries,

bonuses, fees, stock options, stock awards, and other compensation in 2006, and $240,517 in 2007.

May is a citizen of Massachusetts.

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38.

Defendant Patricia E. Mitchell (“Mitchell”) has been a member of the Board since

2001. She is a member of the Compensation and Benefits Committee and the Corporate Governance

Committee of the Board. In exchange for her purported trust, loyalty, and fidelity to BOA, Mitchell

was paid $415,558 in salaries, bonuses, fees, stock options, stock awards, and other compensation in

2006, and $210,517 in 2007. Mitchell is a citizen of New York.

39.

Defendant Thomas M. Ryan (“Ryan”) has been a member of the Board since 2004,

when Bank of America acquired FleetBoston. He is a member of the Compensation and Benefits

Committee and the Chair of the Corporate Governance Committee of the Board. In exchange for his

purported trust, loyalty, and fidelity to BOA, Ryan was paid $432,890 in salaries, bonuses, fees,

stock options, stock awards, and other compensation in 2006, and $230,517 in 2007. Ryan is a

citizen of Rhode Island.

40.

Defendant O. Temple Sloan (“Sloan”) has been a member of the Board since 1996.

He is the “Lead Director” of the Board, Chair of the Compensation and Benefits Committee, a

member of the Corporate Governance Committee, and Chair of the Executive Committee of the

Board. In exchange for his purported trust, loyalty, and fidelity to BOA, Sloan was paid $318,125 in

salaries, bonuses, fees, stock options, stock awards, and other compensation in 2006, and $290,000

in 2007. Sloan is a citizen of North Carolina.

41.

Defendant Meredith R. Spangler (“Spangler”) has been a member of the Board since

1988. She and her family own over 32,000,000 shares of BOA common stock – approximately eight

times as much as Lewis and 16 times as much as any other Board member. She is a member of the

Compensation and Benefits Committee and the Corporate Governance Committee of the Board. In

exchange for her purported trust, loyalty, and fidelity to BOA, Spangler was paid $942,774 in

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salaries, bonuses, fees, stock options, stock awards, and other compensation in 2006, and $210,517

in 2007. Spangler is a citizen of North Carolina.

42.

Defendant Robert L. Tillman (“Tillman”) has been a member of the Board since

2005. He is a member of the Asset Quality Committee of the Board. In exchange for his purported

trust, loyalty, and fidelity to BOA, Tillman was paid $317,479 in salaries, bonuses, fees, stock

options, stock awards, and other compensation in 2006, and $210,517 in 2007. Tillman is a citizen

of North Carolina.

43.

Defendant Jackie M. Ward (“Ward”) has been a member of the Board since 1994.

She is Chair of the Asset Quality Committee of the Board. In exchange for his purported trust,

loyalty, and fidelity to BOA, Ward was paid $982,528 in salaries, bonuses, fees, stock options, stock

awards, and other compensation in 2006, and $230,517 in 2007. Ward also serves as a director of at

least five other corporations: Equifax, Inc., Flowers Foods, Inc., Sanmina-SCI Corporation, SYSCO

Corporation and Wellpoint, Inc. Ward is a citizen of Georgia.

44.

Defendant Joe L. Price (“Price”) is the Chief Financial Officer of BOA. In

exchange for his purported trust, loyalty, and fidelity to BOA, Joe Price was paid $6,486,717 in

salaries, bonuses, fees, stock options, stock awards, and other compensation in 2007. Price is a

citizen of North Carolina.

45.

Defendant Amy Woods Brinkley (“Brinkley”) is the Global Risk Executive of BOA,

in charge of controlling the company’s credit, market, and operational risks. In exchange for her

purported trust, loyalty, and fidelity to BOA, Brinkley was paid $9,335,362 in salaries, bonuses,

fees, stock options, stock awards, and other compensation in 2007. Brinkley is a citizen of North

Carolina.

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46.

Defendant Brian T. Moynihan (“Moynihan”) is the head of BOA’s Global Banking

and Global Wealth and Investment Management unit, the most senior position associated with

Merrill’s operations at BOA. Moynihan replaced Thain in this position when Thain resigned on

January 22, 2009. Previously, Moynihan was the President of Global Corporate and Investment

Banking of BOA, and its General Counsel. He is a former high-ranking officer of FleetBoston,

which BOA acquired in 2004. In exchange for his purported trust, loyalty, and fidelity to BOA,

Moynihan was paid $10,104,274 in salaries, bonuses, fees, stock options, stock awards, and other

compensation in 2007. Moynihan is a citizen of North Carolina.

47.

Defendant R. Eugene Taylor (“Taylor”) is the Former Vice Chairman and Former

President, Global Corporate and Investment Banking of BOA. He retired on December 31, 2007.

In exchange for his purported trust, loyalty, and fidelity to BOA, Taylor was paid $13,298,247 in

salaries, bonuses, fees, stock options, stock awards, and other compensation in 2007. Taylor is a

citizen of North Carolina.

48.

Defendant Neil A. Cotty (“Cotty”) is the Chief Accounting Officer of BOA. Cotty

is a citizen of North Carolina.

49.

Defendant Keith T. Banks (“Banks”) is the President, Global Wealth and Investment

Management of BOA. He was a high-ranking officer of FleetBoston, which BOA acquired in 2004.

Cotty is a citizen of North Carolina.

The Merrill Defendants

50.

Defendant John A. Thain (“Thain”) was the Chief Executive Officer of Merrill and

Chairman of the Merrill Board from 2007 to January 1, 2009. Thain became the President of Global

Banking, Securities and Wealth Management of BOA on January 1, 2009 but resigned in scandal on

January 22, 2009, following reports of massive losses and wasteful practices at Merrill. In exchange

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for his purported trust, loyalty, and fidelity to Merrill, Thain in 2007 was paid over $17,300,000 in

salaries, bonuses, fees, stock options, stock awards, and other compensation. Between January 1,

2007 and December 31, 2008, Thain, based upon his knowledge of material, non-public information

about the company, sold over $795,434 worth of Merrill stock. Thain is a citizen of New York.

51.

Defendant Carol T. Christ (“Christ”) was a member of the Merrill Board from 2007

until January 1, 2009. She was a member of the Public Policy and Responsibility Committee of the

Board. In exchange for her purported trust, loyalty, and fidelity to Merrill, Christ in 2007 was paid

over $191,000 in fees, stock awards, and other compensation. Christ is a citizen of Massachusetts.

52.

Defendant Armando M. Codina (“Codina”) was a member of the Merrill Board from

2005 until January 1, 2009. He was Chair of the Nominating and Corporate Governance Committee

of the Board, and a member of the Management Development and Compensation Committee. In

exchange for his purported trust, loyalty, and fidelity to Merrill, Codina in 2007 was paid over

$270,000 in fees, stock awards, and other compensation. Codina is a citizen of Florida.

53.

Defendant Judith Mayhew Jonas (“Jonas”) was a member of the Merrill Board from

2006 until January 1, 2009. She was a member of the Public Policy and Responsibility Committee

and the Audit Committee of the Board. In exchange for her purported trust, loyalty, and fidelity to

Merrill, Jonas in 2007 was paid over $275,000 in fees, stock awards, and other compensation. Jonas

is a citizen of the United Kingdom.

54.

Defendant Virgis W. Colbert (“Colbert”) was a member of the Merrill Board from

2006 until January 1, 2009. He was a member of the Public Policy and Responsibility Committee,

the Nominating and Corporate Governance Committee, and the Management Development and

Compensation Committee of the Board. In exchange for his purported trust, loyalty, and fidelity to

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Merrill, Colbert in 2007 was paid over $261,000 in fees, stock awards, and other compensation.

Colbert is a citizen of Wisconsin.

55.

Defendant Aulana L. Peters (“Peters”) was a member of the Merrill Board from

1994 until January 1, 2009. She was a member of the Public Policy and Responsibility Committee

and the Management Development and Compensation Committee of the Board. In exchange for her

purported trust, loyalty, and fidelity to Merrill, Peters in 2007 was paid over $270,000 in fees, stock

awards, and other compensation. Peters is a citizen of California.

56.

Defendant Charles O. Rossotti (“Rossotti”) was a member of the Merrill Board from

2004 until January 1, 2009. He was Chairman of the Finance Committee and a member of the Audit

Committee of the Board. In exchange for his purported trust, loyalty, and fidelity to Merrill,

Rossotti in 2007 was paid over $274,000 in fees, stock awards, and other compensation. Rossotti is

a citizen of Maryland.

57.

Defendant John D. Finnegan (“Finnegan”) was a member of the Merrill Board from

2004 until January 1, 2009. He was Chair of the Management Development and Compensation

Committee, and a member of the Finance Committee and the Nominating and Corporate Governance

Committee of the Board. In exchange for his purported trust, loyalty, and fidelity to Merrill,

Finnegan in 2007 was paid over $282,000 in fees, stock awards, and other compensation. Finnegan

is a citizen of New Jersey.

58.

Defendant Joseph W. Prueher (“Prueher”) was a member of the Merrill Board from

2001 until January 1, 2009. He was Chair of the Public Policy and Responsibility Committee and a

member of the Audit Committee of the Board. In exchange for his purported trust, loyalty, and

fidelity to Merrill, Prueher in 2007 was paid over $278,000 in fees, stock awards, and other

compensation. Prueher is a citizen of Virginia.

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59.

Defendant Ann N. Reese (“Reese”) was a member of the Merrill Board from 2004

until January 1, 2009. She was Chair of the Audit Committee and a member of the Finance

Committee of the Board. In exchange for her purported trust, loyalty, and fidelity to Merrill, Reese

in 2007 was paid over $277,000 in fees, stock awards, and other compensation. Reese is a citizen of

New York.

60.

Defendant Nelson Chai (“Chai”) was the Executive Vice President and Chief

Financial Officer of Merrill at all relevant times. Chai is a citizen of New York.

The Advisor Defendants

61.

Defendant Deloitte & Touche LLP (“Deloitte”) is an independent registered public

accounting firm that advises Merrill on a regular basis. Deloitte is a limited liability partnership

organized and existing under the laws of the State of Delaware, with its principal place of business in

New York, New York.

62.

Defendant Fox-Pitt Kelton Cochran Caronia Waller (USA) LLC (“FPK”) is a

leading global specialist investment bank focused on the financial services industry. FPK is a

limited liability company organized and existing under the laws of the State of Delaware, with its

principal place of business in New York, New York.

63.

Defendant J.C. Flowers & Co. LLC (“J.C. Flowers”) is a principal investment firm

specializing in buyouts which sometimes serves as a financial advisor to companies in the banking

and financial services industries. J.C. Flowers is a limited liability company organized and existing

under the laws of the State of Delaware, with its principal place of business in New York, New

York.

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Definitions of Groups

64.

The “Merrill Defendants” comprise those defendants named in paragraphs 50-60

hereof.

65.

The “BOA Defendants” comprise those defendants named in paragraphs 28-49

hereof.

66.

The “BOA Director Defendants” (sometimes referred to herein as the “BOA

Board”) comprise those persons serve on the BOA Board named in paragraphs 28-43 hereof.

67.

The “BOA Officer Defendants” comprise those defendants who served as officers of

Merrill during the events complained of named in paragraphs 28 and 44-49 hereof.

68.

The “Advisor Defendants” comprise those defendants named in paragraphs 61-63

hereof.

I.



SUBSTANTIVE ALLEGATIONS APPLICABLE TO THE
BOA DEFENDANTS CONCERNING AUCTION RATE SECURITIES.

A.

69.

DESCRIPTION OF BOA’S ARS BUSINESS.

BOA’s Global Corporate and Investment Banking Group (“GCIB”), also known as

Banc of America Securities, LLC, provides mergers and acquisitions advisory, underwriting, capital

markets, as well as sales and trading in fixed income and equities markets. The ARS issued, sold,

and marketed by BOA were all transacted within the GCIB group.

B.

70.

THE ARS MARKET.

ARS are securities which have no fixed rates of return, but whose rates of return are

periodically re-set – typically every 7, 14, 28, or 35 days, but in some cases even daily – by an

auction process. ARS are usually issued with maturities of 30 years, but the maturities can range

from five years to perpetuity.

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71.

First developed in 1984, by 2008 the market for ARS had grown to well over $300

billion annually. Traditionally, the market was limited to institutional investors, but the minimum

investment in ARS was reduced to $25,000, placing these securities within the reach of individual

investors.

72.

ARS are auctioned at the “par” value – i.e., a specific dollar amount worth of

securities. The pricing variable consists of the interest rate or dividend yield that the auction process

determines. The rate or yield on any ARS is supposed to be set by a “Dutch” auction in which bids

with successively higher rates are accepted until all of the securities in a particular auction are sold.

73.

Investors typically can submit only the following types of orders:



(a)

a “hold” order, which is the default order for current investors (i.e., the order

that is entered for a current holder if the holder takes no action), where a current investor will

keep the securities at the rate at which the auction clears;



(b)

a “hold-at-rate” bid, where a current investor will only keep the securities if

the clearing rate is at or above the specified rate;



(c)

a “sell” order, where a current investor will sell the securities regardless of the

clearing rate; or



(d)

a “buy” bid, where a prospective investor (or current investor who desires

additional securities) will buy securities if the clearing rate is at or above the specified rate.

74.

As stated by disclosure documents (such as prospectuses) issued with respect to each

ARS, an investor’s order is irrevocable. The final rate at which all of the securities are sold is the

“clearing rate” that applies to all of the securities in the series until the next auction. Bids with the

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lowest rate and then successively higher bids are accepted until all of the sell orders are filled. The

clearing rate is the lowest rate bid sufficient to cover all of the securities for sale in the action.1

75.

If there are not enough bids to cover the securities for sale, then the auction fails, the

issuer pays an above-market rate set by a pre-determined formula described in the disclosure

documents, and all of the current holders continue to hold the securities, with some minor

exceptions. If all of the current holders of the security elect to hold their positions without bidding a

particular rate, then the clearing rate, referred to as the “all-hold” rate, is a below-market rate set by a

different formula.

76.

The issuer of each ARS selects one or more broker-dealers to underwrite the offering

and/or manage the auction process. Investors can only submit orders through the selected broker-

dealers. BOA was one of the largest broker-dealers participating in the ARS market.

77.

The issuer pays an annualized fee to each broker-dealer, such as BOA, engaged to

manage an auction. The fee is typically 25 basis points (i.e., 25% of 1%) for the par value of the

securities managed by that broker-dealer.

78.

The issuer also selects an auction agent to collect the orders and determine the

clearing rate for the auction. Investors must submit orders for an auction to the broker-dealer by a

specified deadline. Many broker-dealers have an internal deadline by which investors must submit

their orders to them.


1 Here is a simplified example of such an auction. Suppose $75,000 par value of securities were for
sale and the auction received four buy bids. Bid 1 was for $25,000 at 3.05%. Bid 2 was for $25,000
at 3.10%. Bid 3 was for $35,000 at 3.10%. Bid 4 was for $20,000. In these circumstances, the
“clearing rate” would be 3.10%, meaning all of the securities in the series would pay an interest rate
(or yield, as the case may be) of 3.10% until the next auction. Bid 1 would be allocated $25,000.
Bids 2 and 3 would receive pro-rata allocations of the remaining $50,000 worth of securities in
proportion to the ratio of the par value bid for in each to the total par value bid for in both. Bid 4
would receive nothing.

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79.

This internal deadline allows the broker-dealer sufficient time to process and submit

the orders to the auction agent. Other broker-dealers allow investors to submit orders up to the

submission deadline, i.e., the deadline for all broker-dealers to submit orders to the auction agent.

The broker-dealers must submit the orders to the auction agent before the submission deadline, and

usually must identify each separate order.

80.

After receiving the orders from the broker-dealers, the auction agent calculates the

clearing rate that will apply until the next auction. If there is only one broker-dealer, however, as

was the case in many of the auctions managed by BOA, the broker-dealer can discern the clearing

rate before submitting orders to the auction agent.

81.

The auction agent allocates the securities to the broker-dealers based on the orders

they submitted. The auction procedures generally state that orders are filled in the following order:

hold orders, hold-at-rate and buy bids with a rate below the clearing rate, hold-at-rate orders with a

rate at the clearing rate, and buy bids with a rate at the clearing rate.

82. When there are more bids for securities at the clearing rate than securities remaining

for sale, the securities are allocated on a pro rata basis first to the hold-at-rate bidders and then to the

buy bidders. Generally, the auction procedures require broker-dealers to follow the same hierarchy

in allocating the securities to their customers.

C.

83.

“RED FLAGS” PUT THE BOA DEFENDANTS
ON NOTICE OF CONTROL DEFICIENCIES AND
IMPROPER PRACTICES IN THE ARS MARKET.



From 1984 to 2006, the ARS market had grown to more than $200 billion annually,

and the fees collected by the ten or so broker-dealers who dominated the market exceeded $600

million annually.

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84.

The success of the ARS market at BOA – on which the BOA Defendants’ reputations

and bonuses were based – depended on the perception that the market was extremely liquid. This is

because the primary target customers for ARS are investors with short-term investment goals or

cash-equivalent needs. Any hint that the ARS market was not liquid had the potential to trigger a

massive sell-off by investors flocking to safer, more stable securities. A failed auction, or even the

rumor of one, was a something that the BOA Defendants sought to avoid at all cost, even if it meant

steering the company into an illegal course of action.

85.

In spite of this danger, in practice, the ARS auctions as a whole were not nearly liquid

enough to support the billions of dollars’ worth of these securities that broker-dealers such as the

BOA Defendants had caused or allowed the company to market to investors on a daily basis.

86.

Beginning in 2007, tightening credit sharply reduced the numbers of purchasers of

ARS, resulting in there being an inadequate number of purchasers to support the auctions. Against

this backdrop, the BOA Defendants – to continue selling the company’s inventory of ARS, to protect

the profits the company made on them, and to enhance their own positions and compensation –

conspired to create the illusion that the ARS repurchase market was liquid and remained liquid.

Throughout 2007, these defendants caused or allowed BOA to engage in various practices designed

to “support” the market, which they termed market “stabilization.” Moreover, these defendants

labored to misrepresent ARS to customers as safe and liquid securities, knowing full well that the

market was drying up, that the company’s ability to support the market was doubtful, and that if it

were to walk away from the market, customers would be left holding billions of dollars in illiquid

securities.

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87.

The BOA Defendants’ conduct, however, was nothing short of the type of market

manipulation scheme that the securities laws have, for generations, proscribed – a fact of which these

defendants were well aware beginning no later than 2006.

88.

Indeed, in an administrative proceeding dated May 31, 2006, the SEC found that

BOA and other broker-dealers had engaged in various illegal practices in order to make it appear that

the auctions were successful and legitimate when, in fact, they were not. These actions, and the

SEC’s findings, were the direct and foreseeable consequence of the BOA Defendants’ having

knowingly encouraged the practices in question. The misconduct at issue in 2006 was a direct

precursor of the BOA Defendants’ conduct during the Relevant Period, involving manipulation of

the market for ARS and failure to disclose the true facts concerning that market to customers.

89.

For example, broker-dealers such as BOA were found to have routinely taken over

their customers’ bid orders by filling in the blanks on open or market orders after viewing other

bidders’ orders. This practice allowed BOA and other broker-dealers to bestow discounts on certain

customers at the direct expense of other customers, and also allowed the broker-dealers to

manipulate the clearing rate of the auction.

90.

In addition, broker-dealers could bid for their own accounts without disclosing this

fact to customers, and the broker-dealers could ask their customers to change their orders, in both

cases so as to allow the broker-dealer to:



(a)

prevent auctions from failing, thereby supporting the broker-dealers claim that

the ARS market was very liquid and no auction had ever failed for want of orders; and



(b)

set artificial “market” rates, at levels essentially dictated solely by the broker-

dealers themselves.

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91.

The SEC also found that broker-dealers had rearranged bids through a process of

“netting” of in-house buy and sell orders ahead of actual auctions in order to change the priority of

bids. Thus, before submitting bids to the auction agent, broker-dealers changed or “prioritized” their

customers’ bids to increase the likelihood that the bids would be filled. As a result of this

prioritization, as well as a similar practice known as “cross-trading,” certain bids were secretly

moved up in the disclosed hierarchy for the order in which bids of various types would be filled. In

many instances, these practices resulted in certain customers’ bids displacing other customers’ bids

when the auction was oversubscribed, which falsely affected the clearing rate, and did not conform

to the disclosed procedures.

92.

The SEC also found that BOA and other broker-dealers allowed the rampant

submission or revision of bids after external and/or internal deadlines. In addition, the broker-

dealers themselves submitted or revised bids after these deadlines. These practices favored investors

or the broker-dealers who bid after a deadline by displacing other investors’ bids, affected the

clearing rate, and did not conform to the disclosed procedures.

93.

The SEC also found that broker-dealers such as BOA had collaborated with certain of

their customers by asking them to bid at auctions and then compensating in the secondary market

with rates that were higher than the clearing rate on the auction itself. For example, certain broker-

dealers persuaded customers to submit bids at lower rates than the customers actually wanted to

receive, allowing the auction to clear at the lower rate, buying the securities from the investor after

the auction at the clearing rate, and then selling the securities back to the investor at the same rate

but below par value. Some broker-dealers did not even trouble themselves to convince customers to

submit a “straw man” bid and, instead, simply displaced those customers’ bids and then sold them

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securities at below par value in the secondary market. Also, some broker-dealers provided higher

returns to c