"The bank and the two named executives are charged with failing to inform
the bank's board of directors and shareholders of the major red ink on
Merrill Lynch's books prior to the merger. CEO Lewis, CFO Price, and
other BofA officers and professionals chose to hide $16 billion of
Merrill Lynch known pre tax losses prior to board approval. That's
fraud, plain and simple." Michael Collins, Economic Populist, February 8, 2009
The complaint also, "charges that the same parties with strong arming
the federal government for $20 billion to cover Merrill's debt by
threatening to back out of the merger if the money wasn't forthcoming." Economic Populist
We don't know the exact direction that Schneiderman's investigation
and charges will take (if they are any). However, Morgenson notes that
Schneiderman may be looking at current civil charges claiming, "that the
banks dumped loans they knew to be troubled into securities and then
misled investors about the quality of those underlying mortgages when
selling the investments." New York Times, May 16
There is a tight fit between the illegal acts and the subject matter of those acts in both Cuomo's case and the attorney general's direction, according to the Morgenson article.
Selling troubled securities without disclosure is precisely the type of fraud that Cuomo charged against Bank of America - defrauding investors on a deal by withholding vital information.
The information withheld in the Bank of America case concerned the huge losses Merrill had incurred in the collateralized debt obligation (CDO) and mortgage backed securities (MBS) market.
The Permanent Subcommittee on Investigations April hearings and report dealt with a broad range of appalling Wall Street behavior leading to the financial crisis. In a memo from Chairman Carl Levin (D-MI) and ranking member Tom Coburn (R-OK), the behavior that Schneiderman is reportedly investigating is described in clear terms:
Steering Borrowers to High Risk Loans. WaMu and Long Beach [as examples] too often steered borrowers into home loans they could not afford"
Polluting the Financial system.
WaMu and Long Beach securitized $77 billion in subprime loans", used
Wall Street firms to sell " worldwide, and polluted the financial system
with mortgage backed securities. Sen. Carl Levin (D-MI), Sen. Tom
Coburn (R-OK), Permanent Subcommittee on Investigations, April 13, 2010
Schneiderman's focus benefits from the groundwork laid by Cuomo's 2009 action. That's a considerable benefit given the depth of interviews and analysis in Cuomo's New York complaint.
The attorney general can also call on the contributions of former Special Inspector General for TARP, Niel Barofsky. The former SIGTARP collaborated wiht Cuomo in the Bank of America complaint. Schneiderman also has the benefit of exhaustive evidence developed by the Senate's Permanent Subcommittee on Investigations.
Should he file a complaint, the attorney general of New Your will have a solid foundation preceding his efforts. Using these resources would provides the opportunity for broad based civil and criminal actions .
The Martin Act
Cuomo's charge against Bank of America, Lewis and Price were brought using the Martin Act, a 1921 New York law designed to promote investigations of fraudulent stock market schemes. The law has some unique provisions:
purpose of the Martin Act is to arm the New York attorney general to
combat financial fraud. It empowers him to subpoena any document he
wants from anyone doing business in the state; to keep an investigation
totally secret or to make it totally public; and to choose between
filing civil or criminal charges whenever he wants. People called in for
questioning during Martin Act investigations do not have a right to
counsel or a right against self-incrimination. Combined, the act's
powers exceed those given any regulator in any other state." Nicholas Thompson, Legal Affairs, May/June 2004
The infrequently used law was the centerpiece of Elliot Spitzer's investigations into Wall Street fraud as New York AG, prior to his election as governor. Had Spitzer survived, it would have produced an array of fraud cases prior to the financial crisis.