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BofA's $4 Billion Case Against Bear Stearns Survives Motion to Dismiss
The American Lawyer
October 05, 2009
Correction: A previous version of this story incorrectly reported that Judge Crotty dismissed Bank of America's breach of contract claims against Bear Stearns. In fact, he let stand BofA's fraud-based breach of contract claim while dismissing a claim based on Bear's alleged breach of disclosure obligations under a collateral management agreement. We regret the error.
If revenue is down this year among Am Law 100 firms, don't blame the Bank of America. BofA is doing its best to boost the fortunes of America's big firm lawyers, as evidenced by a particularly litigious week in which the bank faced an amended securities class action complaint, stepped up the defense of its soon-to-be-former CEO, settled an employment dispute and got some good news from a Manhattan federal district court judge who's not named Rakoff.
We already told you about the latest development in the securities class action, in which an ad hoc group of pension funds is trying to capitalize on alleged deficiencies in BofA's disclosures about its September 2008 merger with Merrill Lynch. Questions about those disclosures -- and investigations of the deal by state, federal and Congressional investigators -- led to the announcement on Wednesday that embattled CEO Kenneth Lewis will resign by the end of the year. Lewis also disclosed that he has hired former Manhattan U.S. Attorney Mary Jo White of Debevoise & Plimpton to join a defense team that already includes Charlotte, N.C., white-collar defense specialist James Wyatt III of Wyatt & Blake.
In the employment case, Bank of America reached a settlement with the former head of Merrill Lynch's brokerage unit, Robert McCann. McCann, who has reportedly been offered a chance to head UBS's brokerage, sued BofA in New York Supreme Court in August, claiming the bank was trying to prevent him from taking the new job. BofA, which was represented in the case by Proskauer Rose, didn't release the terms of the settlement.
In the most significant piece of litigation news for Bank of America this week, Manhattan federal district court Judge Paul Crotty ruled from the bench on Wednesday that the bank's $4 billion suit against Bear Stearns Asset Management and two former Bear hedge fund managers can proceed. Here's a transcript of the hearing, at which Barry Berke of Kramer Levin Naftalis & Frankel argued for Bear Stearns and Lawrence Robbins of Robbins, Russell, Englert, Orseck, Untereiner & Sauber argued for BofA. (Lisa Cahill of Hughes Hubbard and Reed appeared for former Bear hedge fund manager Ralph Cioffi, and Theresa Trzaskoma of Brune & Richard for Matthew Tannin.) Crotty's ruling, in which he granted Bear's motion to dismiss two of five counts but kept the other three claims alive.
As we've previously reported, Bank of America claimed that Bear and the two since-indicted execs committed fraud and breach of contract when they allegedly misled the bank about the health of two failing hedge funds in connection with an incredibly complicated $4 billion deal supported by mortgage-backed securities. Judge Crotty concluded the bank's three fraud claims, including a fraud-based breach of contract claim, should stand "because [the complaint] alleges facts that constitute strong circumstantial evidence of conscious misbehavior and recklessness." He dismissed the breach of fiduciary duty claim and a second breach of contract claim, but gave BofA leave to replead the contract allegations.
After reading the hearing transcript, we can't say Crotty's ruling came as a surprise. He seemed loath to give up what he called an "extrordinary" case so early in the proceeding, at one point saying to Bear counsel Berke: "Why at this stage should I throw the case out? Why shouldn't we have a little bit more discovery?"
Now Bear -- and Bank of America -- will get it. Berke declined to comment on the ruling; Robbins Russell referred our call to a BofA spokesman, who also declined to comment.
This article first appeared on The Am Law Litigation Daily blog on AmericanLawyer.com.
