N.Y. inquiry has Boston business A-list in its sights

Cuomo scrutinizing Merrill’s losses, bonuses

By Todd Wallack
Globe Staff / September 18, 2009

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Several of New England’s most prominent business executives have been swept up in New York Attorney General Andrew Cuomo’s probe into whether Bank of America misled shareholders about its $50 billion purchase of the troubled investment bank Merrill Lynch.

NStar chief executive Thomas May, CVS/Caremark group boss Thomas Ryan, former Liberty Mutual CEO Gary Countryman, Boston venture capitalist John Collins, and former FleetBoston chief executive Charles “Chad’’ Gifford were all members of the Bank of America board when the company agreed to buy Merrill Lynch, rescuing it from a potentially devastating bankruptcy as the financial markets were collapsing last year.

Cuomo is in the process of subpoenaing those five, plus the other 10 board members at the time, said a person who has been briefed on the investigation but who is not authorized to speak publicly about it.

Cuomo is investigating whether bank officials deliberately withheld from share holders, who were voting on the purchase of Merrill Lynch, information that the company’s losses were much larger than previously disclosed. Also under investigation is whether shareholders were not told that the bank had approved Merrill’s plan to pay its employees as much as $5.8 billion in bonuses.

Cuomo declined to comment on the subpoenas. But in a statement to the Globe, he said he wants to hold directors accountable as the representatives of a company’s shareholders.

“We intend to find out what Bank of America’s board knew and when they knew it during the Merrill Lynch merger and its aftermath,’’ Cuomo said.

Last year, the credit crisis also caused the collapse of the Wall Street titans Bear Stearns and Lehman Bros. It was a period Cuomo has referred to as the “economic debacle of a generation.’’

In his statement to the Globe, Cuomo questioned whether directors did their jobs: “Did the Boards of Directors of our largest financial institutions protect the rights of shareholders, were they misled, or were they little more than rubber stamps for management’s decision-making?’’

None of the five New England directors responded to requests for comment.

A Bank of America spokesman, Scott Silvestri, declined to answer specific questions about the attorney general’s investigation, but said: “We will continue to cooperate with the attorney general’s office as we maintain that there is no basis for charges against either the company or individual members of the management team.’’

In August, Bank of America agreed to settle a case brought by the Securities and Exchange Commission that accused the bank of misleading investors by not notifying them it had already authorized the Merrill bonuses. Without admitting or denying guilt, Bank of America agreed to pay $33 million.

But this week, US District Judge Jed Rakoff in Manhattan threw out the settlement, noting that the money Bank of America agreed to pay would ultimately come from its shareholders, not from bank executives’ pockets.

“It does not comport with the most elementary notions of justice and morality,’’ Rakoff said. “It proposes that the shareholders who were the victims of the bank’s alleged misconduct now pay the penalty for that misconduct.’’

Traditionally, corporate director slots were plum jobs with six-figure compensation and little responsibility beyond showing up for regular meetings.

However, as shareholders and regulators have become more active in corporate affairs in recent years, board members have come under greater scrutiny and their duties have become more demanding, particularly in verifying the company’s financial condition.

The five New Englanders each received more than $100,000 a year from Bank of America for serving on its board. They all date their membership back to FleetBoston Financial, where they were board members when Bank of America acquired the New England institution in 2004. May and Countryman were on the board of Bank of Boston when it was sold to Fleet, and Gifford was both Bank of Boston and Fleet’s chief executive at the time of their sales.

Collins and Countryman resigned from the Bank of America board this summer as part of a broader shake-up of the board.

In documents filed with regulators, the bank suggested its directors are heavily involved in oversight. All attended at least three-quarters of the company’s 13 board meetings last year, and all attended the annual shareholder meeting.

Directors were also encouraged to participate in eight telephone briefings about the company’s financial condition, as well as meetings for committees on which they serve. For instance, the Audit Committee held 10 meetings last year, while the executive committee met six times.

Collins and May were on the Audit Committee at the time of the Merrill acquisition.

Regardless of their workloads, directors are not used to being called to account by powerful government investigators such as New York’s attorney general. It’s more common for regulators to simply interview company employees when they investigate.

“We’re writing history here,’’ said Nell Minow, cofounder of the Corporate Library, a corporate governance research firm in Portland, Maine. The financial crisis, she noted, has upset many long-held conventions about how the government regulates companies and manages the economy.

Cuomo is considering charging Bank of America’s chief executive, Kenneth Lewis, and other bank executives for failing to fully disclose Merrill’s financial condition and the bonus plan. Some specialists said it was unlikely he would charge directors.

While corporate directors are responsible for the company’s management, said Boston University law professor Tamar Frankel, they are usually not accused of wrongdoing unless they were involved in a violation.

Frankel said it makes sense for Cuomo to interview them if he thinks they have information that would shed light on the Merrill episode.

“To the extent [Cuomo] has the power to subpoena people, he can subpoena people,’’ Frankel said. “Of course, they could say we heard nothing, we know nothing.’’

Todd Wallack can be reached at


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