Did Merrill Lynch Lie to Congress?
Did John Thain move up big bonuses to Merrill executives shortly before its massive losses were announced? That’s what New York Attorney General Andrew Cuomo wants to know. Charlie Gasparino reports.
UPDATE: New York Attorney General Andrew Cuomo just turned the screws even tighter on former Merrill Lynch Ceo John Thain by accusing the firm of “misleading” Congress about the timing of its 2008 bonuses. As readers of the The Daily Beast already know, Cuomo has had his sights on Thain over a November 11 meeting, in which he moved up the date Merrill was to pay bonuses to senior executives to some time in December 2008. (Merrill normally paid its bonuses in January after its fiscal year ends.) Cuomo wants to know if Thain moved up the bonus date because firm was about to announce large losses that would scuttle the payments. Thain says he's done nothing wrong in moving up the date; it was allowed under the agreement Merrill had to merge with its current owner, Bank of America. But he might have other problems; Cuomo released a letter tonight in which Merrill Lynch informed Rep. Henry Waxman that the firm had not made compensation decisions as of late November. The problem for Merrill, and possibly Thain, is that the letter was mailed after the November 11 meeting. Stay tuned.
In a Daily Beast exclusive, Charlie Gasparino reports that New York Attorney General Andrew Cuomo is focused on the role of ex-Merrill CEO John Thain in awarding bonuses shortly before massive losses were announced.
Listen to the headlines, and it sounds like New York Attorney General Andrew Cuomo’s investigation of the big bonuses paid to top Merrill Lynch executives before its purchase by Bank of America, has the big bank, not Merrill, in its sights. After all, Cuomo’s top investigators have lambasted Bank of America CEO Ken Lewis for not being forthcoming in providing the names of the Merrill executives who received $3.6 billion in bonus money before Merrill announced a $15 billion fourth-quarter loss last year. Cuomo’s office is examining whether Ken Lewis should have disclosed to his shareholders that he had gone to the government for bailout money in mid-December, once the size of the Merrill losses became evident, according to people close to the inquiry. And just yesterday, Cuomo teamed up with Barney Frank, the powerful chairman of the House Financial Services Committee, demanding that BofA hand over the bonus information, which the company considers proprietary.
At issue for Cuomo's investigators: a key Merrill Lynch Board meeting in November.
But lost in the controversy is another leg in the burgeoning inquiry: The Daily Beast has learned that Cuomo is looking at whether Thain purposely moved up the timing of Merrill’s bonuses to early December, just before the losses were reported. Such a move could be problematic for Thain, say people close to the investigation. Though the investigation is far from complete, if Thain purposely moved up the bonuses knowing that future losses could scuttle the payments, these people say, that might constitute fraud under a New York State law known as the Martin Act, in which the bar to charge targets with civil or even criminal fraud is much lower than under federal securities statutes.
Thain, of course, denies there’s any fraud involved. A spokesman, Jesse Derris, says “The merger agreement provided for the payment of bonuses prior to the deal closing. The timing of those payments was determined by the compensation committee of the Merrill Lynch board consistent with the merger agreement.” (A spokesman for Bank of America declined to comment.)
Initially Cuomo’s investigation had all the earmarks of an old-fashioned fishing expedition into the bonuses. It was a strategy more akin to the probes launched by his predecessor, Eliot Spitzer, who used publicity and perp walks –with little of anything substantive to show for it--to become governor of New York.
But what has Cuomo’s investigators digging deeper into the matter –they plan on deposing or interviewing most if not all of the Merrill board members—is Thain’s timing. At issue for Cuomo’s investigators: A key Merrill Lynch board meeting in November. Thain met with the Merrill Lynch board on November 11, 2008, with a proposal to pay bonuses to Merrill executives before the end of the year.
At the time, Merrill’s mortgage assets were declining in value, how much is still unclear. Then on December 5, Bank of America shareholders approved the bank’s purchase of Merrill, and on December 8, the Merrill board approved the size of the bonus pool: $3.2 billion, according to people close to the inquiry (The cash portion of the bonus, 70 percent of its total—was handed out in late December. The rest, paid in Bank of America stock, came in early January).
At that time of the merger's approval, Merrill’s losses were in the range of $6 billion to $8 billion, though still not disclosed to shareholders, according to people close to the investigation. Nearly a week after the bonuses were paid, Ken Lewis went to Washington and asked for additional bailout money because Merrill’s losses were mounting. After the end of the quarter in January, Merrill officially announced a $15 billion after-tax loss.
Officials at Bank of America have said in depositions and interviews with Cuomo’s office that they did not know Thain had moved up the timing of the bonus payments in November. But people close to Thain say the former Merrill CEO had numerous meetings with BofA executives about the bonus payments around the time the deal was approved by shareholders. They say that not only did Thain have the contractual authority to make the bonus payments, he was also using sound business judgment in paying the money: If he didn’t make those payments, top executives would have left the firm. “These guys had major clients they could take anywhere and they would have gutted the firm,” said one person close to Thain.
It’s unclear how much people in Cuomo’s office will be swayed by the argument that Thain had to pay the bonuses for the good of the company. A spokesman for Cuomo’s office had no comment on the matter, but people close to the investigation concede that while he had the authority to pay as much as $5.8 billion in bonuses, he could have paid nothing as well. So why did Thain pay the money? At first, Thain himself was seeking a bonus of around $10 million. When his bonus request was leaked, Thain was roundly criticized because of Merrill’s financial problems, and he decided not take the money (as did his senior staff). Still, people close to Thain, who at first considered himself a possible successor to Lewis as CEO, wanted to pay the bonuses to retain talent that he would need to grow Merrill’s business.
To be sure, Cuomo’s office is far from concluding that Thain or anyone else at Merrill did anything wrong. Thain has provided testimony on the matter, and has said that it was always his intention to pay out bonuses before the end of the year. Merrill’s shotgun marriage with BofA occurred in mid-September, the same weekend Lehman Brothers filed for bankruptcy liquidation, and Merrill was coming under pressure as well; lenders were pulling lines of credit and making large margin calls and most analysts believed the firm would have suffered the same fate of Lehman barring Thain’s move to sell the nation’s largest brokerage firm to Bank of America.
But even if Merrill suffered massive losses, people close to Thain argue, the merger agreement gave him specific authority to give the bonuses and those payments had to be made before the deal closed at the end of the year, no matter how much money the firm lost in the fourth quarter. People close to Cuomo’s office also concede that the investigation has hit various roadblocks and there’s a real possibility no charges will be filed. For one thing, there’s plenty of conflicting testimony concerning the timing of the bonuses and who knew what about the size of the losses. Lewis, for his part, has said under oath that his people objected to the size of the Merrill bonuses when they were disclosed. People close to Thain say the merger agreement stated explicitly that Merrill executives would be paid bonuses as part of the deal, so the timing doesn’t really matter.
In the end, Cuomo’s office “might just walk away and make policy recommendations concerning bonus payments,” said one person close to the probe.
If Cuomo’s office does walk away without filing charges, it won’t be Thain or even Lewis on the hot seat, but possibly Cuomo himself, given all the press attention that has been dedicated to the case. Said one senior Wall Street executive, reflecting the views of many people on the Street: “This is nothing but an opportunity for Cuomo to drum up press for his next political move and run for governor.”
Charles Gasparino is CNBC's On-Air Editor and appears as a daily member of CNBC's ensemble. He is a columnist for the Daily Beast and a frequent contributor to the New York Post, Forbes, and other publications. His forthcoming book about the financial crisis, The Sellout, is scheduled to be published later in 2009.