Professional Documents
Culture Documents
ww
w.
St
op Fo
re
clo
DORIS GASTINEAU, an individual, Plaintiff, vs. CHARLES K. GIFFORD, THOMAS J. MAY, BRIAN T. MOYNIHAN, CHARLES O. HOLLIDAY, JR., MUKESH D. AMBANI, SUSAN S. BIES, FRANK P. BRAMBLE, SR., VIRGIS W. COLBERT, D. PAUL JONES, JR., MONICA C. LOZANO, DONALD E. POWELL, CHARLES O. ROSSOTTI, ROBERT W. SCULLY, WILLIAM P. BOARDMAN, BARBARA J. DESOER and KENNETH D. LEWIS, Defendants, and BANK OF AMERICA CORPORATION, Nominal Defendant.
) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )
VERIFIED SHAREHOLDER DERIVATIVE COMPLAINT FOR BREACH OF FIDUCIARY DUTY AND FOR VIOLATIONS OF 14(a) AND 20(a) OF THE SECURITIES EXCHANGE ACT OF 1934
su re
Fr au d. co
behalf of nominal defendant Bank of America Corporation (Bank of America or the Com-
pany), submits this Verified Shareholder Derivative Complaint against the defendants named herein. Plaintiffs allegations are based on personal knowledge as to herself and her own acts, and upon information and belief developed from the investigation and analysis of her counsel, which include, among other things, public filings by Bank of America with the U.S. Securities and Exchange Commission (SEC), press releases, news reports, analyst reports, matters of public record available from various state and federal government websites, complaints pending against the Company in state and federal courts, and other information available in the public
based on personal knowledge are likely to have evidentiary support after a reasonable opportunity for further investigation, discovery, and analysis.
1.
This is a shareholder derivative action brought on behalf and for the benefit of
Bank of America against certain of its current and former directors. Bank of America is a global financial services company, and provides consumers, corporations, governments and institutions with a range of financial products and services. Plaintiff seeks to remedy the serious financial and reputational harm that Bank of America has suffered, and will continue to suffer, from the inadequate servicing of its troubled residential mortgage loans. Plaintiff also seeks redress for the Companys false and misleading Schedule 14A definitive proxy statement filed with the SEC on March 30, 2011 (the Proxy). 2.
shareholders from at least January 1, 2009 to the present (the Relevant Period). Specifically,
ww
they failed to implement and maintain adequate internal controls to manage the foreseeably immense financial fall-out from inadequate residential mortgage loan underwriting standards
even though they reviewed, approved, and caused the Company to file financial statements 2
w.
Defendants named herein breached their fiduciary duties of loyalty to the Company and its
St
op Fo
re
clo
I.
su re
domain. To the best of Plaintiffs knowledge, information, and belief, the allegations herein not
Fr au d. co
mortgages in the magnitude of multiple billions of dollars of potential exposure. Moreover, these defendants have utterly failed and refused to pursue pecuniary relief for the Company against any of the wrongdoers. 3.
On April 13, 2011, the Office of the Comptroller of the Currency (OCC)
publicized findings from its fourth quarter 2010 investigation into Bank of Americas mortgage servicing and foreclosure processing practices. As a result of that investigation, the OCC concluded that Bank of America (through its wholly-owned subsidiary, Bank of America, N.A.): engaged in improper servicing and foreclosure practices; lacked sufficient resources to ensure
policies, and procedures, compliance risk management, internal audit, third party management, and trained personnel; failed to supervise outside counsel and other third parties handling foreclosure-related services; and engaged in unsafe or unsound banking practices. The above findings were made public in the OCCs formal enforcement agreement with Bank of America as set forth in the Stipulation and Consent to the Issuance of a Consent Order entered In the Matter of: Bank of America, N.A. Charlotte, NC AA-EC11-12 (the OCC Consent Order). 4. A few days prior to publication of the Consent Order, on March 29, 2011,
Individual Defendants Susan S. Bies, Frank P. Bramble, Sr., Virgis W. Colbert, Charles K. Gifford, Charles O. Holliday, Jr., D. Paul Jones, Jr., Monica C. Lozano, Thomas J. May, Brian T. Moynihan, Donald E. Powell, Charles O. Rossotti, and Robert W. Scully executed the stipulation agreeing to the issuance of the OCC Consent Order. This order took effect on April 13, 2010 upon its execution by an OCC official.
ww
Carolina, Docket No. 11-029-B-HC (the Federal Reserve Consent Order), approved of by Bank of Americas board of directors (the Board) at a duly constituted meeting and that requires them to ensure that Bank of America, N.A. performs its obligations under the OCC 3
w.
5.
St
That same day, the Federal Reserve publicized the consent order to cease and
op Fo
re
clo
su re
proper administration of its foreclosure processes; lacked adequate oversight, internal controls,
Fr au d. co
during that time with the SEC that depicted the Companys increasingly distressed residential
While these consent orders provide for the implementation of some important
reforms to Bank of Americas internal controls relative to its default loan management,1 they fall well short in another aspect of paramount importance to the Companynamely, there is zero monetary consideration to be provided by the Individual Defendants named herein, or by anyone else, to the Company for their wrongdoing. The signatories to these consent orders were
perfectly aware of the problems embodied withinor reflectedby them. They were willing to agree to partial remedial action only after causing the Company to expend significant resources
expenditures to defend its interests in litigation across the country plagued with reported residential mortgage loan modification and foreclosure irregularitiesmany of which were undisputed by the Company. 7.
Further, despite the Boards knowledge of the irregularities that plagued the
Companys default loan management, including the executed consent orders, the Board authorized the filing of the Proxy without making reference to the OCC Consent Order, and failed to cause the Company to publish an amended Proxy that referred to that order or the Federal Reserve Consent Order. At the same time, the Board recommended that shareholders vote against a proposal made by a coalition of institutional shareholders to investigate, report the results of such investigation to shareholders, and to reform a significant portion of the Companys internal controls relative to default loan management. The Boards spin on the proposal was that [t]he substantial measures our company has taken to enhance our residential
disclosures our company has already provided regarding the requested information, adequately
ww
Default loan management refers to residential home loan collections, loss mitigation, bankruptcy, foreclosure, real estate owned and post-foreclosure claims processing. 4
w.
mortgage loss mitigation and foreclosure processes, together with the extensive public
St
op Fo
re
clo
su re
responding to, and negotiating with, the OCC and other regulators, and to incur significant
Fr au d. co
Consent Order and to submit written plans to the Federal Reserve for its approval that would
America to participate in a settlement with the Attorneys General of several states in which the
Company is to pay a share of at least $5 billion related to alleged improper residential mortgage loan servicing practices. 9.
America not only failed to pursue remedies against those who were responsible for the misconduct alleged herein, it also failed to devote adequate resources to the management of its billions of dollars of troubled loans. As a result, the Company has suffered, and will continue to suffer, huge amounts of damages from, inter alia, (a) losses associated with foreclosure
ownership interests; (b) expenditures related to the defense of put-back, qui tam, homeowner, and robo-signer litigation commenced against the Company or its subsidiaries during the Relevant Period; (c) book value losses to its mortgage servicing rights; (d) expenditures related to the fourth quarter 2010 interagency review of Bank of Americas foreclosure policies and practices conducted by OCC, the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision; (e) monies that it will be obligated to repay to borrowers in connection with financial injury caused by errors, misrepresentations, or other improper foreclosure practices; and (f) reputational damages. II. JURISDICTION AND VENUE 10. This Court has jurisdiction over all counts alleged herein pursuant to 29 U.S.C.
1332(a)(2) in that Plaintiff and all defendants are citizens of different states and the matter in controversy exceeds $75,000, exclusive of interest and costs. For Plaintiffs claims for violations of sections 14(a) and 20(a) of the Securities and Exchange Act of 1934 (15 U.S.C. 78a et seq., the Exchange Act) and SEC Rule 14a-9 promulgated thereunder, this Court has jurisdiction
ww
pursuant to section 27 of the Exchange Act. This action is not brought collusively to confer jurisdiction on a court of the United States that it would not otherwise have. This Court has
w.
St
op Fo
re
clo
su re
5
proceedings that have been delayed, dismissed, and/or refilled due to improperly-documented
Fr au d. co
8.
1367(a). 11.
more of the defendants either resides or maintains executive offices in this District, a substantial portion of the transactions and wrongs complained of occurred in the District of Massachusetts, and certain of the defendants have received substantial compensation in this District by doing business here and engaging in numerous activities that had an effect here. III. PARTIES 12.
subsidiaries, Bank of America or the Company) is organized under the laws of the State of Delaware and has its principal executive offices at Bank of America Corporate Center, 100 North Tryon Street, Charlotte, North Carolina. Bank of America is one of the worlds largest
corporations and governments with a full range of banking, investing, asset management and other financial and risk management products and services. Through its banking subsidiaries and various nonbanking subsidiaries throughout the United States and in certain international markets, the Company provides a diversified range of banking and nonbanking financial services and products through six business segments: Deposits, Global Card Services, Home Loans & Insurance, Global Commercial Banking, Global Banking & Markets, and Global Wealth & Investment Management, with the remaining operations recorded in All Other. At year-end 2008, the Home Loans & Insurance segment has been a material part of the Company and at all
ww
times relevant to this action, residential mortgage loans held by the Company comprised approximately 13% or more of its total earning assets.
w.
St
op Fo
re
financial institutions, serving individual consumers, small- and middle-market businesses, large
clo
su re
6
all times during the Relevant Period, and is a current shareholder of the Company. She is a
Fr au d. co
supplemental jurisdiction over the state law causes of action alleged herein pursuant to 28 U.S.C.
2004 and formerly served as its Chairman. He chairs the Boards Credit Committee and is a
member of its Executive Committee. The Board determined that he is not independent. His other experience includes Chairman and Chief Executive Officer of FleetBoston Financial Corporation, which was acquired by Bank of America in April 2004, and is a trustee of NSTAR. Gifford is a resident of Massachusetts. 15. 2004.
Defendant Thomas J. May has been a director of Bank of America since April
Enterprise Risk Committee. His other experience includes President, Chief Executive Officer
acquired by Bank of America in June 2004. May is a resident of Massachusetts. 16. Defendant Brian T. Moynihan has been a director of Bank of America and its
President and Chief Executive Officer since January 2010. He is a member of the Boards Executive Committee. The Board determined that he is not independent. His prior experience includes service as Executive Vice President of FleetBoston Financial Corporation, which was acquired by Bank of America in June 2004. Moynihan is a resident of Massachusetts. 17. Defendant Charles O. Holliday, Jr. has been a director of Bank of America since
September 2009 and its Chairman since April 2010. His other experience includes Chairman and Chief Executive Officer of DuPont de Nemours and Company. Holliday is a resident of Delaware. 18.
March 2011. He is a member of the Boards Compensation and Benefits Committee and of the
ww
She is a member of the Boards Audit Committee (and determined by the Board to be an audit committee financial expert as defined by the SEC) and the Enterprise Risk Committee. Her other 7
w.
Credit Committee. His other experience includes Chairman and Managing Director of Reliance
19.
St
Defendant Susan S. Bies has been a director of Bank of America since June 2009.
op Fo
re
clo
su re
and Chairman of NSTAR and as a director of FleetBoston Financial Corporation, which was
Fr au d. co
14.
Defendant Charles K. Gifford has been a director of Bank of America since April
System, Senior Advisory Board Member to Oliver Wyman Group, a member of the SEC Advisory Committee on Improving Financial Reporting, and Chief Financial Officer of First Tennessee National Corporation. Bies is a resident of South Carolina. 20.
Defendant Frank P. Bramble, Sr. has been a director of Bank of America since
January 2006. He chairs the Boards Enterprise Risk Committee. His other experience includes Vice Chairman of MBNA Corporation and Chairman of Allfirst Financial, Inc. and Allfirst Bank. Bramble is a resident of Maryland. 21.
Worldwide Operations for Miller Brewing Company. Colbert is a resident of Wisconsin. 22. Defendant D. Paul Jones, Jr. has been a director of Bank of America since June
2009. He is a member of the Boards Audit Committee (and determined by the Board to be an audit committee financial expert as defined by the SEC) and the Corporate Governance Committee. His other experience includes Chairman and Chief Executive Officer of Compass Bancshares, Inc. and as a member of the Board of the Federal Reserve Bank of Atlanta. Jones is a resident of Alabama. 23.
Defendant Monica C. Lozano has been a director of Bank of America since April
2006. She is a member of the Boards Corporate Governance Committee, Credit Committee, and Executive Committee. Her other experience includes Chief Executive Officer of
ImpreMedia, LLC, President and Chief Operating Officer of Lozano Enterprises, and
California.
ww
2009. He is a member of the Boards Audit Committee (and determined by the Board to be an audit committee financial expert as defined by the SEC), the Compensation and Benefits 8
w.
24.
St
Defendant Donald E. Powell has been a director of Bank of America since June
op Fo
re
clo
su re
January 2009. He is a member of the Boards Corporate Governance Committee and the
Fr au d. co
experience includes service as a member of the Board of Governors of the Federal Reserve
Federal Deposit Insurance Corporation and Chairman, Chief Executive Officer and President of The First National Bank of Amarillo. Powell is a resident of Texas. 25.
January 2009. He chairs the Boards Audit Committee (and determined by the Board to be an audit committee financial expert as defined by the SEC). His other experience includes Senior Advisor to The Carlyle Group, Commissioner of Internal Revenue of the Internal Revenue Service, and co-founder of American Management Systems, Inc. Rossotti is a resident of the District of Columbia. 26.
2009. He is a member of the Boards Audit Committee (and determined by the Board to be an audit committee financial expert as defined by the SEC) and chairs the Compensation and Benefits Committee. His other experience includes membership of the Office of the Chairman of Morgan Stanley and as its co-President, Managing Director of Lehman Brothers and Managing Director of Salomon Brothers. Scully is a resident of New York. 27. Defendant William P. Boardman served as a director of Bank of America between
June 2009 and May 11, 2011. He was a member of the Boards Compensation and Benefits Committee and of the Credit Committee. His other experience includes Vice Chairman of Bank One Corporation, Chairman of Visa International, and Senior Advisor to The Goldman Sachs Group. Boardman is a resident of Florida. 28. Defendant Barbara J. Desoer has served as President of Bank of America Home
America from April 1, 2001 to December 31, 2009, and served as its President from July 1, 2004
ww
to December 31, 2009. He had served as its Chairman from February 2005 until the Companys shareholders stripped him of that position in April 2009. He also served as Chief Executive
w.
29.
St
op Fo
re
clo
su re
9
Defendant Robert W. Scully has been a director of Bank of America since August
Fr au d. co
Committee, and the Executive Committee. His other experience includes Chairman of the
The defendants named in paragraphs 14-26 above may be collectively referred to The defendants named in paragraphs 14-29 above may be
Bank of Americas Dramatically Increased Presence in the U.S. Mortgage Servicing Business. 31. On July 1, 2008, Bank of America announced that it completed its purchase of
Countrywide Financial Corp. The acquisition created one of the nations largest mortgage originators and servicers. 32.
In its Form 10-K for fiscal year 2008, the Company characterized certain of its
residential mortgage loans as SOP 03-3 to identify them as loans having evidence of credit
the Company would be unable to collect all contractually required payments. At the end of
33.
The Home Loans & Insurance segment of the Company accounts for nearly 20%
of the U.S. first mortgage origination market, making Bank of America the nations largest mortgage service. By March 31, 2010, its servicing portfolio totaled 13,739,823 loans for an unpaid principal balance of approximately $2.14 trillion.2 B. The Federal Bailout of the Company and its Servicing-Related Promises.
Department of the Treasury may purchase a variety of troubled assets, including mortgage-
ww
Moodys Investor Service, Moodys places Bank of Americas primary and special servicer quality ratings on review for possible downgrade (October 4, 2010.) 10
w.
related assets and the various types of securities based on such assets, if they were originated on
St
34.
In early October 2008, TARP was signed into law. Under TARP, the U.S.
op Fo
re
2008, the unpaid principal balance of such loans was $55.4 billion.
clo
quality deterioration since origination and for which it was probable at the time of purchase that
su re
Fr au d. co
Officer, President and a director of Bank of America, N.A. until December 31, 2009. Lewis is a
dollars to purchase bank equity shares through the Capital Repurchase Program. 35.
At the same time, Congress created the Congressional Oversight Panel (the
COP) to review the current state of financial markets and the regulatory system. The COP was empowered to hold hearings, review official data, and write reports on actions taken by Treasury and financial institutions and their effect on the economy. Through regular reports, the COP must oversee Treasurys actions, assess the impact of spending to stabilize the economy, evaluate market transparency, ensure effective foreclosure mitigation efforts, and guarantee that Treasurys actions are in the best interests of the American people. 36.
HAMP, which is a national mortgage modification program that provides eligible borrowers the opportunity to modify their first lien mortgage loans to make them more affordable. Any lending institution that has accepted TARP funds must participate in HAMP, and must apply a uniform loan modification process to provide eligible borrowers with affordable and sustainable monthly payments for their first lien mortgage loans. Affordability is achieved through the application of interest rate reduction, term extension, principal forbearance and/or principal forgiveness. 37. On October 13, 2008, defendant Lewis, and representatives from eight other large
financial institutions (including one subsequently acquired by the CompanyMerrill Lynch & Co., Inc. (Merrill Lynch)) attended a meeting in Washington D.C. with the senior officials of the Federal Reserve, U.S. Treasury, and Federal Deposit Insurance Corporation (FDIC) to discuss a federal solution to the stress being experienced by the U.S. financial system. As authorized by TARP, the institutions agreed to participate in a program involving bank liability
meeting indicate that Lewis and the other financial institution executives in attendance were
ww
instructed as follows: we want each of you to contact your Boards of Directors and confirm your participation this evening.
w.
guarantees and capital purchases by the federal government. The CEO Talking Points for this
St
op Fo
re
clo
11
su re
Consistent with the TARP mandate, the Treasury Department also implemented
Fr au d. co
or before March 14, 2008. The Treasury Department also was authorized to expend billions of
executed a Major Financial Institution Participation Commitment dated October 13, 2008, which provided as follows:
In support of the US financial system and the broader US economy, Bank of America agrees to:
Issue Preferred Shares in the amount of $15 billion to the U.S. Treasury under the terms and conditions of the TARP Capital Purchase Program announced today. Participate in the FDIC program guaranteeing new issues of eligible senior liabilities by banks and bank holding companies and transaction accounts as announced today under the systemic risk exemption invoked by the FDIC, U.S. Treasury, and the Federal Reserve.
Continue to work diligently, under existing programs, to modify the terms of residential mortgages as appropriate to strengthen the health of the U.S. housing market.
39.
Participation Commitment dated October 13, 2008, which provided as follows: In support of the US financial system and the broader US economy, Merrill Lynch agrees to: Issue Preferred Shares in the amount of $10 billion to the U.S. Treasury under the terms and conditions of the TARP Capital Purchase Program announced today. Participate in the FDIC program guaranteeing new issues of eligible senior liabilities by banks and bank holding companies and transaction accounts as announced today under the systemic risk exemption invoked by the FDIC, U.S. Treasury, and the Federal Reserve. Expand the flow of credit to U.S. Consumers and businesses on competitive terms to promote the sustained growth and vitality of the U.S. economy. Continue to work diligently, under existing programs, to modify the terms of residential mortgages as appropriate to strengthen the health of the U.S. housing market.
ww
Commitment in October 2008, Bank of America issued to the U.S. Treasury 600,000 shares of Bank of America Corporation Fixed Rate Cumulative Perpetual Preferred Stock, Series N, for 12
w.
40.
St
op Fo
re
clo
su re
Expand the flow of credit to U.S. Consumers and businesses on competitive terms to promote the sustained growth and vitality of the U.S. economy.
Fr au d. co
38.
As a result of this meeting, and having consulted the Companys Board, Lewis
Company issued to the U.S. Treasury 400,000 shares of Bank of America Corporation Fixed
Rate Cumulative Perpetual Preferred Stock, Series Q, for $10 billion. The Series N and Q Preferred Stock initially pay quarterly dividends at a five percent annual rate that increases to nine percent after five years. In connection with these investments, the Company also issued to the U.S. Treasury 10-year warrants to purchase approximately 121.8 million shares of Bank of America Corporation common stock. 41.
As part of the Merrill Lynch acquisition, in January 2009 the Company issued to
the U.S. Treasury an additional 800,000 shares of Bank of America Corporation Fixed Rate
pays dividends at an eight percent annual rate and may only be redeemed after the Series N and Q Preferred Stock have been redeemed. In connection with this investment, the Company also issued to the U.S. Treasury 10-year warrants to purchase approximately 150.4 million shares of Bank of America Corporation common stock. 42.
In April 2009, Bank of America, via its Bank of America, N.A. business unit, also
agreed to participate in HAMP. That month, Bank of America signed a Servicer Participation Agreement (amended and restated in January 2010) agreeing to perform loan modification and other foreclosure prevention services set forth in applicable HAMP guidelines and other procedures issued by the Treasury Department, Fannie Mae or Freddie Mac. In doing so, Bank of America became eligible to receive $1,000 or more for each completed permanent modification under HAMP. It also agreed to implement the following internal controls: Servicer shall develop, enforce and review on a quarterly basis for effectiveness an internal control program designed to: (i) ensure effective delivery of Services in connection with the Program and compliance with the Program Documentation; (ii) effectively monitor and detect loan modification fraud; and (iii) effectively monitor compliance with applicable consumer protection and fair lending laws. The internal control program must include documentation of the control objectives for Program activities, the associated control techniques, and mechanisms for testing and validating the controls. Servicer shall provide Freddie Mac with access to all internal control reviews and reports that relate to Services under the Program performed by Servicer and its independent auditing firm to enable Freddie Mac to fulfill its duties as a 13
ww
w.
St
op Fo
re
clo
su re
Cumulative Perpetual Preferred Stock, Series R, for $20 billion. The Series R Preferred Stock
Fr au d. co
$15 billion. Also, as part the Companys acquisition of Merrill Lynch, in January 2009, the
43.
On December 30, 2008, during a special meeting of the Companys Board, Lewis
advised Bramble, Gifford, May, Lozano, and Moynihan that during managements recent discussions with federal regulators, they expressed their dim view of the economy and concern regarding the Corporations ability to remain stable in light of their own view of the economy, the Corporations earnings prospects and the stability of the banking industry. Lewis described the federal regulators dim view of the near term economy and their projections of the economys impact on the Corporations earning prospects for 2009. 44. On February 27, 2009, Individual Defendants Lewis, Bramble, Colbert, Gifford,
Lozano, May and Rossotti caused the Company to file its 2008 Form 10-K with the SEC. In
or uncertainties reasonably likely to have a material effect on the Companys results of operations or financial condition. The 2008 Form 10-K stated that the Company faced the following risks, among others:
ww
*** Instability of the U.S. financial system. Beginning in the fourth quarter of 2008, the U.S. government has responded to the ongoing financial crisis and economic slowdown by enacting new legislation and expanding or establishing a number of programs and initiatives. Congress and the U.S. government continue to evaluate and develop various programs and initiatives designed to stabilize the financial and housing markets and stimulate the economy, including the U.S. Treasurys recently announced Financial Stability Plan and the U.S. governments recently announced foreclosure prevention program. The failure of these efforts to stabilize the financial markets and a continuation or worsening of current or financial market conditions could materially and adversely affect our business, financial condition, results of operations, access to credit, or the trading price of our common stock and other equity and debt securities.
w.
St
op Fo
Business and economic conditions. . Given the concentration of our business activities in the United States, we are particularly exposed to downturns in the U.S. economy. For example, in a poor economic environment there is a greater likelihood that more of our customers or counterparties could become delinquent on their loans or other obligations to us, which, in turn, could result in a higher level of charge-offs and provision for credit losses, all of which would adversely affect our earnings.
re
clo
doing so, these defendants certified and/or were responsible for discussing known trends, events
14
su re
Fr au d. co
V. A.
THE INDIVIDUAL DEFENDANTS WRONGFUL CONDUCT Defendants Knew that Bank of America Required Significant Additional Resources To Properly Discharge its Default Loan Management Responsibilities.
compliance agent of the United States; a copy of the reviews and reports will be provided to Fannie Mae for record keeping and other administrative purposes.
45.
The Individual Defendants also acknowledged in the 2008 Form 10-K that
potentially hundreds of thousands of the Companys residential borrowers, representing approximately $100 billion in mortgage financings, would require the Companys assistance with loan modifications. 46.
2009 with the SEC. For that quarter, non-performing residential mortgage loans rose to $10.8
ww
billion from $7 billion at year-end 2008. Residential mortgage loans past due by 90 days or more rose to $411 million from approximately $370 million at year-end 2008. Non-performing residential mortgage loans and residential mortgage loans past due by 90 days or more together 15
w.
Lozano and Rossotti caused the Company to file its Form 10-Q for the quarter-ended March 31,
St
op Fo
re
*** Credit and concentration risk. When we loan money, commit to loan money or enter into a letter of credit or other contract with a counterparty, we incur credit risk, or the risk of losses if our borrowers do not repay their loans or our counterparties fail to perform according to the terms of their contracts. As one of the nations largest lenders, the credit quality of our portfolio can have a significant impact on our earnings. Negative economic conditions are likely to adversely affect our home equity line of credit, credit card and other loan portfolios, including causing increases in delinquencies and default rates, which we expect could impact our charge-offs and provision for credit losses. We have experienced concentration of risk with respect to our consumer real estate and credit card portfolios, each of which represents a large percentage of our overall credit portfolio. The current financial crisis and economic slowdown has adversely affected these portfolios and exposed this concentration of risk. Continued deterioration in real estate values and household incomes could result in materially higher credit losses. *** Reputational risks. Our ability to attract and retain customers and employees could be adversely affected to the extent our reputation is damaged. Our actual or perceived failure to address various issues could give rise to reputational risk that could cause harm to Bank of America and our subsidiaries and our business prospects. These issues include, but are not limited to, appropriately addressing potential conflicts of interest; legal and regulatory requirements; ethical issues; money-laundering; privacy; properly maintaining customer and associate personal information; record keeping; sales and trading practices; and the proper identification of the legal, reputational, credit, liquidity and market risks inherent in our products. Failure to appropriately address any of these issues could also give rise to additional regulatory restrictions, reputational harm and legal risks, which could among other things increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties and cause us to incur related costs and expenses.
clo
su re
Fr au d. co
up from about 2.9% at year-end 2008. Provision for credit losses associated with the Home Loan & Insurance business segment increased $1.6 billion to $3.4 billion compared to the three
months ended March 31, 2008 driven by reserve increases in the home equity portfolio associated with a reduction in principal cash flows expected to be collected on the Countrywide SOP 03-3 portfolio and higher net charge-offs reflective of deterioration in the economy and the housing markets particularly in geographic areas that have experienced higher unemployment and the most significant declines in home prices. Home Loans & Insurance recorded a net loss of $498 million. 47.
and Analysis of Financial Condition and Results of Operations (MDA) explained, in part: First Quarter 2009 Economic Environment During the first quarter of 2009, credit quality deteriorated further as the economy continued to weaken. Consumers experienced high levels of stress from higher unemployment and underemployment as well as further declines in home prices. These factors combined with further reductions in spending by consumers and businesses and continued turmoil in the financial markets negatively impacted the commercial portfolio. These conditions drove increases in consumer and commercial net charge-offs, and nonperforming assets as well as higher commercial criticized utilized exposure and reserve increases across most portfolios during the three months ended March 31, 2009. For more information on credit quality, see the Credit Risk Management discussion beginning on page 130. *** The above conditions, together with deterioration in the overall economy, will continue to affect many of the markets in which we do business and may adversely impact our results for the remainder of 2009. The degree of the impact is dependent upon the duration and severity of such conditions. 48.
Colbert, Lozano, and Rossitti caused the Company to file its Form 10-Q for the quarter ended June 30, 2009 with the SEC. For that quarter, non-performing residential mortgage loans rose to
ww
$13.6 billion. Residential mortgage loans past due by 90 days or more rose to $477 million. Non-performing residential mortgage loans and residential mortgage loans past due by 90 days or more together represented about 5.7% of the Companys $246 billion of outstanding 16
w.
St
op Fo
re
clo
su re
Item 2 within the May 7, 2009 Form 10-Q contained Managements Discussion
Fr au d. co
represented about 4.3% of the Companys $261 billion of outstanding residential mortgage loans,
Insurance business segment increased $692 million to $2.7 billion compared to the three months
ended June 30, 2008 driven by economic and housing market weaknesses particularly in geographic areas experiencing higher unemployment and falling home prices. In addition, reserves were increased in the Countrywide SOP 03-3 portfolio reflecting a reduction in expected principal cash flows. Home Loans & Insurance recorded a net loss of $725 million. 49. The MDA contained in the August 7, 2009 Form 10-Q explained, in part:
50.
file its Form 10-Q for the quarter-ended September 30, 2009. For that quarter, non-performing residential mortgage loans rose to $15.5 billion. Residential mortgage loans past due by 90 days or more rose to $2.325 billion. Non-performing residential mortgage loans and residential
ww
mortgage loans past due by 90 days or more together represented about 7.5% of the Companys $239 billion of outstanding residential mortgage loans. Provision for credit losses associated 17
w.
St
Bies, Bramble, Colbert, Jones, Lozano, Powell, Rossotti, and Boardman caused the Company to
op Fo
Second Quarter 2009 Economic Environment During the first six months of 2009, credit quality deteriorated further as the global economy continued to weaken. Consumers experienced high levels of stress from higher unemployment and underemployment as well as further declines in home prices. Consumer net charge-offs in our consumer real estate portfolios increased reflecting deterioration in the economy and housing markets particularly in geographic areas that have experienced the most significant declines in home prices. The weak economy also drove higher losses in the consumer credit card portfolio. These factors combined with further reductions in spending by consumers and businesses also negatively impacted the commercial portfolio. Higher commercial net charge-offs were driven by commercial real estate, reflecting deterioration across various property types, and the commercial domestic portfolio, reflecting broad-based deterioration in terms of borrowers and industries. In addition to increased net charge-offs, nonperforming assets and commercial criticized utilized exposure were higher and reserves were increased across most portfolios during the six months ended June 30, 2009. For more information on credit quality, see the Credit Risk Management discussion beginning on page 155. *** The above conditions, together with continued weakness in the overall economy, will continue to affect many of the markets in which we do business and may adversely impact our results for the remainder of 2009. The degree of the impact is dependent upon the duration and severity of such conditions.
re
clo
su re
Fr au d. co
Provision for credit losses associated with the Home Loan &
compared to the three months ended September 30, 2008 driven by economic and housing market weakness particularly in geographic areas experiencing higher unemployment and falling home prices. In addition, reserves were increased by $726 million in the Countrywide
purchased impaired loan portfolio reflecting a reduction in expected principal cash flows. Home Loans & Insurance recorded a net loss of $1.632 billion. 51.
The MDA contained in the November 6, 2009 Form 10-Q explained, in part:
styled Final Consent Judgment as to Defendant Bank of America Corporation (the SEC
ww
w.
52.
St
2009 Environment The economic recession accelerated in late 2008 and continued to deepen into the first half of 2009 but has shown some signs of stabilization and possible improvement toward the end of the third quarter. Consumers experienced high levels of stress from higher unemployment and underemployment as well as further declines in home prices. These factors led to lower consumer spending, negatively impacting growth in the consumer loan portfolio including credit card and real estate. Consumer net charge-offs in our credit card and real estate portfolios increased reflecting deterioration in the economy and housing markets particularly in geographic areas that have experienced the most significant declines in home prices. The commercial portfolio declined as a result of these factors combined with further reductions in spending by businesses and the resurgence of capital markets which allowed corporate clients to issue bonds and equity to replace loans as a source of funding. Higher commercial net chargeoffs were driven by commercial real estate, reflecting deterioration across various property types, and the commercial domestic portfolio, reflecting broad-based deterioration in terms of borrowers and industries. In addition to increased net charge-offs, nonperforming assets and commercial criticized utilized exposures were higher which contributed to increased reserves across most portfolios during the nine months ended September 30, 2009. For more information on credit quality, see the Credit Risk Management discussion beginning on page 159. *** The above conditions, together with continued weakness in the overall economy and recent and proposed regulatory changes, will continue to affect many of the markets in which we do business and may adversely impact our results for the remainder of 2009 and into 2010. However, we do not expect the impacts to be as significant as those experienced in the first nine months of 2009. The degree of the impact is dependent upon the timing of the economic recovery.
op Fo
re
clo
18
su re
Fr au d. co
with the Home Loan & Insurance business segment increased $2.1 billion to $2.9 billion
Company by the SEC alleging that the Company violated section 14 of the Exchange Act and Rules 14a-3 and 14a-9 thereunder, as a result of the Companys failure to disclose, in connection
with its proxy solicitation for the acquisition of Merrill Lynch, certain information concerning Merrill Lynchs payment of year-end bonuses and its losses in the fourth quarter of 2008. As a result of the SEC Consent Judgment, the Company agreed, inter alia, to certain revisions to its internal controls relative to disclosures in publicly-filed financial and proxy statements, as well as to pay a civil penalty in the amount of $150 million. 53.
Company to file its 2009 Form 10-K with the SEC. In doing so, these defendants certified and/or were responsible for discussing known trends, events or uncertainties reasonably likely to have a material effect on the Companys results of operations or financial condition. The following were among the Companys highlighted risks: Our businesses and earnings have been, and may continue to be, negatively affected by adverse business and economic conditions. Our businesses and earnings are affected by general business and economic conditions in the United States and abroad. Given the concentration of our business activities in the United States, we are particularly exposed to downturns in the U.S. economy. For example, as a result of the challenging economic environment there continues to be a greater likelihood that an elevated number of our customers or counterparties will become delinquent on their loans or other obligations to us, which, in turn, may continue to result in a high level of chargeoffs and provision for credit losses, all of which would adversely affect our earnings and capital levels. General business and economic conditions that could affect us include the level and volatility of short-term and long-term interest rates, inflation, home prices, unemployment and under-employment levels, bankruptcies, household income, consumer spending, fluctuations in both debt and equity capital markets, liquidity of the global financial markets, the availability and cost of credit, investor confidence, and the strength of the U.S. economy and the other economies in which we operate. The deterioration of any of these conditions can adversely affect our consumer and commercial businesses and securities portfolios, as well as our earnings.
ww
The SEC Consent Judgment was entered in the actions styled Securities and Exchange Commission v. Bank of America Corporation, 09 Civ. 6828 (JSR) and 10 Civ. 0215 (JSR) (S.D.N.Y.) 19
w.
St
op Fo
re
clo
su re
Bramble, Colbert, Gifford, Holliday, Jones, Lozano, May, Powell, and Scully caused the
Fr au d. co
Consent Judgment).3 The SEC Consent Judgment arose out of two complaints filed against the
54.
With regard to the enhanced public and regulatory scrutiny, the Companys
2009 Form 10-K also disclosed that it faced an investigation by the Federal Trade Commission (FTC) and that the Company received an FTC staff letter concerning the alleged improper loan servicing practices of BAC Home Loans Servicing, LP, a settlement inquiry related thereto, and a draft complaint and proposed consent order. 55. For the fourth quarter of 2009, the Companys Home Loans & Insurance segment
recorded a net loss of $945 million. Its full year net loss was nearly $3.9 billion, an increase of
ww
50% over that recorded for 2008. 56. With respect to the Companys mortgage banking income, the 2009 Form 10-K
noted that the Company recorded an increase in representations and warranties expense to $1.9 20
w.
St
op Fo
re
*** Our increased credit risk could result in higher credit losses and reduced earnings. Current negative economic conditions are likely to continue to increase our credit exposure to third parties who may be more likely to default on their obligations to us. This increased credit risk could adversely affect our consumer credit card, home equity, consumer real estate and purchased impaired portfolios, among others, including causing increases in delinquencies and default rates, which we expect will continue to impact our charge-offs and provision for credit losses. *** Our ability to attract and retain customers and employees could be adversely affected to the extent our reputation is harmed. Our ability to attract and retain customers and employees could be adversely affected to the extent our reputation is damaged. Our actual or perceived failure to address various issues could give rise to reputational risk that could cause harm to us and our business prospects, including failure to properly address operational risks. These issues also include, but are not limited to, legal and regulatory requirements; privacy; properly maintaining customer and associate personal information; record keeping; money-laundering; sales and trading practices; ethical issues; appropriately addressing potential conflicts of interest; and the proper identification of the legal, reputational, credit, liquidity and market risks inherent in our products. We are also facing enhanced public and regulatory scrutiny resulting from the financial crisis, including the U.S. Treasurys previous investment in our preferred stock, our acquisition of Merrill Lynch, modification of mortgages, volume of lending, compensation practices and the suitability of certain trading and investment businesses. Failure to appropriately address any of these issues could also give rise to additional regulatory restrictions, reputational harm and legal risks, which could among other consequences increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties and cause us to incur related costs and expenses.
clo
su re
Fr au d. co
deterioration in the economy and housing markets combined with a higher rate of repurchase or similar requests. 57.
increase of 135% over the prior year. Residential mortgage loans past due by 90 days or more rose to $11.68 billion, an increase of 3000% over the prior year. Non-perforrming residential mortgage loans and residential mortgage loans past due by 90 days or more together represented about 11.7% of the Companys $242 billion of outstanding residential mortgage loans. 58.
the end of 2010, non-performing residential mortgage loans rose to $17.7 billion.
su re
from year-end 2008s $7.06 billion to $16.6 billion by year-end 2009, an increase of 135%. By The
Companys home equity loans categorized as non-performing rose from 2008s $2.6 billion by the end of 2008 to $3.8 billion by the close of 2009, an increase of nearly 50%. 59. The Companys accruing residential mortgage loans past due 90 days or more
rose from year-end 2008s $372 million to $11.68 billion by the end of 2009an astounding 3000% increase. By year-end 2010, accruing residential mortgage loans past due 90 days or more rose to $16.77 billion. 60.
The Companys allowance for credit losses related to residential mortgage loans
rose from year-end 2008s $964 million to $4.4 billion by the close of 2009, a 350% increase. The Companys allowance for credit losses related to home equity loans rose from year-end 2008s $3.6 billion to $7.2 billion by year-end 2009, a 100% increase. 61.
file to file its Form 10-Q for the quarter-ended March 31, 2010 with the SEC. For that quarter,
ww
non-performing residential mortgage loans rose to $17.8 billion. Residential mortgage loans past due by 90 days or more rose to $13.589 billion. Non-performing residential mortgage loans and residential mortgage loans past due by 90 days or more together represented about 12.8% of the 21
w.
Bramble, Colbert, Jones, Lozano, Powell, Rossotti, Sully and Boardman caused the Company to
St
op Fo
re
clo
Fr au d. co
billion in 2009 from $246 million in 2008, driven by increased estimates of defaults reflecting
associated with the Home Loan & Insurance business segment increased $228 million to $3.6
billion compared to the same period in 2009 due primarily to higher reserve additions amid continued stress in the housing markets, the impact related to certain modified loans that were written-down to the underlying collateral value and net charge-offs related to home equity. Home Loans & Insurance recorded a net loss of $2.1 billion in the three months ended March 31, 2010 compared to a net loss of $494 million for the same period in 2009.
Economic Environment
ww
During the first quarter of 2010, credit quality improved as the economic recovery strengthened and labor markets began to stabilize. Consumer spending picked up, both for retail sales and purchases of motor vehicles. Industrial production rose, as businesses ended their prolonged and dramatic inventory liquidation. Also, business investment on equipment and spending rose sharply. In this improving economic environment most of our loan portfolios, from a credit quality perspective, have either stabilized or improved during the three months ended March 31, 2010. Despite these encouraging signs of improvement, the levels of spending and production remain below their expansion peaks, and the global economic environment remains challenging. Most prominently, unemployment and underemployment levels are very elevated and household debt levels are very high, businesses remain reticent to hire and the real estate markets remain stressed. Losses and criticized loan levels have improved, but remain elevated, and our nonperforming loans are still increasing, although at a slower pace. In addition, in response to the economic challenges, both consumer and commercial customers continue to reduce debt resulting in a reduction in our loan levels which has negatively impacted net interest income. The impact of continued de-leveraging, as well as charge-offs, will negatively impact our ability to grow loan balances. Looking forward, the banking environment and many of the markets in which we conduct business will be influenced by the uneven and fragile global economic recovery, potential for financial turmoil and recent and newly proposed financial reforms. The elevation of the European Union financial crisis may spread and adversely affect global and U.S. capital markets. In this uneasy environment, imposition of new U.S. and global financial regulations, particularly significantly higher capital and liquidity standards and additional fees, will directly affect the banking industry, and may have adverse effects on the pace of economic recovery.
w.
St
op Fo
re
clo
22
su re
62.
The MDA contained in the May 7, 2010 Form 10-Q explained, in part:
Fr au d. co
Companys $245 billion of outstanding residential mortgage loans. Provision for credit losses
entered into a consent order with the FTC, which ended the commissions investigation into loan servicing practices by Countrywide and BAC Home Loans Servicing, LP. It stated, in part, as follows:
As part of the settlement, Countrywide agreed to pay $108 million to the FTC, which was to be
unjustified overcharges from Countrywide related to default loan services. 64. On August 6, 2010, Individual Defendants Gifford, May, Moynihan, Holliday,
Bies, Bramble, Colbert, Jones, Lozano, Powell, Rossotti, Scully, and Boardman caused the
performing residential mortgage loans rose to $18.3 billion. Residential mortgage loans past due by 90 days or more rose to $15.337 billion. Non-performing residential mortgage loans and residential mortgage loans past due by 90 days or more together represented about 13.7% of the
associated with the Home Loan & Insurance business segment was approximately $2.4 billon,
2009.
ww
w.
and the net loss totaled $1.534 billionover twice the amount reported for the same period in
65.
Economic Environment
St
Companys $245 billion of outstanding residential mortgage loans. Provision for credit losses
The MDA contained in the August 6, 2010 Form 10-Q explained, in part:
op Fo
Company to file its Form 10-Q for the quarter-ended June 30, 2010. For that quarter, non-
re
clo
refunded to homeowners who defaulted on their residential mortgage loans but who suffered
23
su re
On April 27, 2010, Countrywide Home Loans, Inc. (CHL) and BAC Home Loans Servicing, LP reached an agreement in principle with the Federal Trade Commission (FTC) to resolve the FTCs investigation into CHLs and BAC Home Loans Servicing, LPs servicing practices. The agreement is evidenced by a consent order under which CHL and BAC Home Loans Servicing, LP agreed, without admitting any wrongdoing, to settle the matter for an amount that is not material to the Corporations consolidated financial statements. The amount was paid to the FTC as equitable relief for consumers whose loans were serviced by CHL and Countrywide Home Loans Servicing, LP prior to their acquisition by the Corporation. The payment to the FTC is not a penalty or a fine. As part of the settlement, CHL and BAC Home Loans Servicing, LP also agreed to a number of additional undertakings related to the servicing of residential mortgage loans that are in payment default or under which the borrower is a debtor in a Chapter 13 bankruptcy case.
Fr au d. co
63.
The Companys Form 10-Q filed on May 7, 2010 also disclosed that it had
66.
Bies, Bramble, Colbert, Jones, Lozano, Powell, Rossotti, Scully, and Boardman caused the Company to file its Form 10-Q for the quarter ended September 30, 2010. For that quarter, nonperforming residential mortgage loans were $18.3 billion. Residential mortgage loans past due by 90 days or more rose to $16.427 billion. Non-performing residential mortgage loans and residential mortgage loans past due by 90 days or more together represented about 14.3% of the
associated with the Home Loan & Insurance business segment was $1.3 billion; the net loss was
ww
$344 million.
w.
Companys $243 billion of outstanding residential mortgage loans. Provision for credit losses
67. The MDA contained in the November 5, 2010 Form 10-Q explained, in part: Economic and Business Environment 24
St
op Fo
re
During the second quarter of 2010, the U.S. economy continued its slow recovery with modest increases in consumer spending and real Gross Domestic Product. Employment rose modestly, and the unemployment rate receded from its peak but remained elevated. Consumer spending on retail sales, motor vehicles and services rose at a healthy pace early in the quarter, but momentum dissipated toward the end of the quarter. Industrial production rose as businesses recover from the prolonged and dramatic inventory liquidation. Also, business investment on equipment and spending rose sharply. In this improving economic environment most of our loan portfolios, from a credit quality perspective, have either stabilized or improved. Despite these encouraging signs of improvement, the levels of spending and production remain below their expansion peaks, and the national and global economic environment remains challenging. Most prominently, unemployment and underemployment levels are elevated and household debt levels are high, businesses remain reticent to hire and the real estate markets remain stressed. Losses and criticized loan levels have improved, but remain elevated, and our nonperforming loans remain elevated but are stabilizing. In addition, in response to the economic challenges, both consumer and commercial customers continue to reduce debt resulting in a reduction in our loan levels which has negatively impacted net interest income. The impact of continued de-leveraging, as well as charge-offs, will negatively impact our ability to grow loan balances. Looking forward, the banking environment and many of the markets in which we conduct business will be influenced by the uneven and fragile global economic recovery, the potential for financial turmoil and recent financial reforms including the Financial Reform Act. The European Union financial crisis may spread or worsen and adversely affect global and U.S. capital markets and undermine the confidence of U.S. consumers and businesses. In this uneasy environment, imposition of new U.S. and global financial regulations, especially significantly higher capital and liquidity standards and additional fees, will directly affect the banking industry, and may have adverse effects on the pace of economic recovery.
clo
su re
Fr au d. co
68.
foreclosure processes:
ww
Review of Foreclosure Processes On October 1, 2010, we voluntarily stopped taking foreclosure proceedings to judgment in states where foreclosure requires a court order following a legal proceeding. On October 8, 2010, we stopped foreclosure sales in all states in order to complete an assessment of the related business processes. These actions did not affect the initiation and processing of foreclosures prior to judgment or sale of real estate owned properties. We took these precautionary steps in order to ensure our processes for handling foreclosures include the appropriate controls and quality assurance. Our review involves an assessment of the foreclosure process, including a review of completed foreclosure affidavits in pending proceedings. We recently announced that we had completed our assessment of our foreclosure affidavit process in the 23 states where foreclosure requires a court order following a legal proceeding. As a result of that review, we have identified and are implementing process and control enhancements to ensure that affidavits are prepared in compliance with state law and have begun a rolling process of preparing and resubmitting, as necessary, affidavits of indebtedness in pending foreclosure proceedings in order to resume the process of taking
w.
St
op Fo
re
clo
The national and global economic environment remains challenging. Most prominently, unemployment levels remain high along with household debt levels, businesses remain reticent to hire and the consumer and commercial real estate markets remain stressed. Nevertheless, during the third quarter of 2010, the U.S. economy continued its recovery, with modest increases in consumer spending and real Gross Domestic Product. Employment rose modestly, but the unemployment rate remained high. Consumer spending on retail sales, motor vehicles and services rose moderately, and businesses increased production to meet demand but did not add materially to inventories. Business investment in equipment and software continued to rise rapidly, but investment in structures continued to decline. Households are saving more and continue to pay down debt, while businesses remain very cautious and hold record levels of cash. This will result in additional pressure on our loan levels which negatively affects net interest income. In this current economic environment, credit quality has improved over the past several quarters as losses and criticized loan levels have declined and our nonperforming loans are stabilizing. To the extent there is continued de-leveraging and businesses utilize operating cash, these factors will negatively impact our ability to grow loan balances. Looking forward, the banking environment and many of the markets in which we conduct business will be influenced by the uneven and fragile global economic recovery and recent financial reforms including the Financial Reform Act. Market expectations that the Federal Reserve will resort to more quantitative easing has flattened the yield curve and depressed the U.S. dollar exchange rate. The European Union financial crisis may spread or worsen and adversely affect global and U.S. capital markets and undermine the confidence of U.S. consumers and businesses. In this uncertain economic environment, imposition of new U.S. and global financial regulations, especially significantly higher capital and liquidity standards and additional fees, will directly affect the banking industry, and may adversely affect our earnings.
25
su re
Fr au d. co
69.
Company to file its Form 10-K for the year ended December 31, 2010. In doing so, these
reasonably likely to have a material effect on the Companys results of operations or financial
ww
condition.
Residential mortgage loans past due by 90 days or more rose to $16.77 billion. Non-performing
w.
defendants certified and/or were responsible for discussing known trends, events or uncertainties
St
Bies, Bramble, Colbert, Jones, Lozano, Powell, Rossotti, Scully, and Boardman caused the
For that year, non-performing residential mortgage loans were $17.7 billion.
op Fo
these foreclosure proceedings to judgment in these states. We estimate this process of resubmitting affidavits will take at least several weeks and could involve as many as 102,000 foreclosure proceedings that were pending as of October 1, 2010. Once these affidavits are resubmitted, there may be prolonged adversary proceedings that delay certain foreclosure sales. We continue to assess our processes in the other 27 states and intend to implement enhancements as appropriate. Subsequent to our announcements that we were temporarily suspending foreclosure sales, law enforcement authorities in all 50 states and the United States Department of Justice and other federal agencies have stated they are investigating whether mortgage servicers have had irregularities in their foreclosure practices. Those investigations, as well as any other governmental or regulatory scrutiny of our foreclosure processes, could result in fines, penalties or other equitable remedies and result in significant legal costs in responding to governmental investigations and possible litigation. While we cannot predict the ultimate impact of the temporary delay in foreclosure sales, or any issues that may arise as a result of alleged irregularities with respect to previously completed foreclosure activities, we may be subject to additional borrower and non-borrower litigation and governmental and regulatory scrutiny related to our past and current foreclosure activities. This scrutiny may extend beyond our pending foreclosure matters to issues arising out of alleged irregularities with respect to previously completed foreclosure activities. We expect that our costs will increase in the fourth quarter of 2010 and will continue into 2011 as a result of the additional resources necessary to perform the foreclosure process assessment, revise affidavit filings and make any other operational changes, which will likely result in higher noninterest expense, including higher servicing costs and legal expenses, in the Home Loans & Insurance business segment. In addition, process changes required as a result of our assessment could increase our default servicing costs over the longer term. Finally, the time to complete foreclosure sales may increase temporarily, which may result in an increase in nonperforming loans and servicing advances and may impact the collectability of such advances and the value of our mortgage servicing rights asset. Accordingly, delays in foreclosure sales, including any delays beyond those currently anticipated, our process enhancements and any issues that may arise out of alleged irregularities in our foreclosure processes could increase the costs associated with our mortgage operations.
re
clo
26
su re
Fr au d. co
represented about 13.4% of the Companys $257 billion of outstanding residential mortgage loans. For the fourth quarter of 2010, the Companys Home Loans & Insurance segment recorded a net loss of $4.9 billionover four times that reported during the same period in 2009. Its full year net loss was over $8.9 billion, which was more than twice the loss reported for 2009. 70.
The Companys 2010 Form 10-K shows that these defendants were quite aware of
the risks presented by Bank of Americas wobbling residential mortgage loan business, and the subsequent foreseeable impacts on its default loan management, which gave rise to a known duty on their part to take proactive steps address such risks. By way of example only, the section of
71.
ww
We temporarily suspended our foreclosure sales nationally in the fourth quarter of 2010 to conduct an assessment of our foreclosure processes. Subsequently, numerous state and federal investigations of foreclosure processes across our industry have been initiated. Those investigations and any irregularities that might be found in our foreclosure processes, along with any remedial steps taken in response to governmental investigations or to our own internal assessment, could have a material adverse effect on our financial condition and results of operations. *** While we cannot predict the ultimate impact of the temporary delay in foreclosure sales, or any issues that may arise as a result of alleged irregularities with respect to previously completed foreclosure activities, we may be subject to additional borrower and non-borrower litigation and governmental and regulatory scrutiny related to our past and current foreclosure activities. This scrutiny may
w.
St
op Fo
Our businesses and results of operations have been, and may continue to be, materially and adversely affected by the U.S. and international financial markets and economic conditions generally. *** The sustained high unemployment rate and the lengthy duration of unemployment have directly impaired consumer finances and pose risks to the financial services sector. The housing market remains weak and the elevated levels of distressed and delinquent mortgages add a significant degree of risk to the mortgage market, in addition to risks inherent to the business of banking. The risks related to the distressed mortgage market may be accentuated by attempts to forestall foreclosure proceedings, as well as state and federal investigations into foreclosure practices throughout the financial services industry. These factors may adversely affect credit quality, bank lending and the general financial services sector.
re
clo
27
su re
the 2010 Form 10-K entitled Item 1A. Risk Factors at page 8 states, in part:
Fr au d. co
residential mortgage loans and residential mortgage loans past due by 90 days or more together
B.
72.
long been the subject of homeowners complaints. Many of these complaints have echoed the same themes articulated by government regulatorse.g., lack of responsiveness to consumer
needed to default before the Company could assist them with modifications; submission of adverse credit reports to credit agencies with respect to troubled borrowers who were making payments pursuant to modifications; pyramiding of fees; demonstrated unwillingness and/or inability to work in good faith with consumers who are ready, willing, able and qualified to receive such a loan modification; and its problematic foreclosure procedures. 73.
consumeraffairs.com) illustrate the inadequacy of Bank of Americas infrastructure to deal with troubled loans:
ww
w.
a. Our mortgage company, Wiltshire, sold our mortgage to Bank of America last year. We had no notice that BOA had taken over our mortgage until we received a phone call in January 2011 from someone giving us a new account number and stating that we would get a statement in the mail. 28
St
op Fo
re
inquiries about residential mortgage loan modifications; advice to troubled borrowers that they
clo
su re
extend beyond our pending foreclosure matters to issues arising out of alleged irregularities with respect to previously completed foreclosure activities. Our costs increased in the fourth quarter of 2010 due to the additional resources necessary to perform the foreclosure process assessment, to revise affidavit filings and to implement other operational changes. This will likely result in higher noninterest expenses, in Home Loans & Insurance. It is also possible that the temporary suspension of foreclosure sales may result in additional costs and expenses, including costs associated with the maintenance of properties or possible home price declines, while foreclosures are delayed. In addition, required process changes could increase our default servicing costs over the longer term. Finally, the time to complete foreclosure sales may increase temporarily, which may result in an increase in non-performing loans and servicing advances and may impact the collectability of such advances and the value of our MSRs, MBS and real estate owned properties. An increase in the time to complete foreclosure sales also may inflate the amount of highly delinquent loans in the Corporations mortgage statistics, result in increasing levels of consumer nonperforming loans, and could have a dampening effect on net interest margin as non-performing assets rise. Accordingly, delays in foreclosure sales, including any delays beyond those currently anticipated, and our continued process enhancements and any issues that may arise out of alleged irregularities in our foreclosure process could increase the costs associated with our mortgage operations. Consumer Complaints About the Companys Residential Mortgage Loan Servicing.
Fr au d. co
In February, we again showed as past due and that was when I realized there was an escrow on the account, which we had never had with Wiltshire. More research showed that they had placed lender financed homeowners insurance. I immediately called and was told where to fax our homeowners insurance. Now mind you, this is February 2011. I had our insurance company fax the information and figured that was that. March comes and again we are past due. I again call and this time am told that there was a lapse in coverage in July 2010. Seriously? And no one tells us? And you wait til January to put an escrow in place? So, I contact our homeowners insurance who states that there was a lapse (had no idea..good thing our house didnt burn down). BOA states that we need to send them $141.98 for the coverage they provided (15 days worth) in order to bring the account current. We could argue and fight, but figure, fine...so I send the $141.98 WITH the statement from BOA that says why we are sending and for what. So...for the past month, I have been getting six phone calls a day from BOA. Then, on Tuesday, we get a check in the mail for $212.50...a REFUND FOR ESCROW THAT WE NEVER HAD...and our payment STILL SHOWS PAST DUE!!! So...today I talk to Ed. He claims they applied my $141.98 that was for insurance to LATE CHARGES! Late charges THEY caused!!! Unfortunately, poor Ed got the brunt of my wrath and he FINALLY says he got it straight...BUT...
They have sent us a check for $1100..the amount of the payment we sent in April because it was less than agreed. Are you KIDDING ME???? So, we have to wait for the $1100 check to arrive and then we send that and the $212.50 BACK to BOA where Ed has applied the $141.98 as a payment...and then he says But it needs to be back by the 1st to avoid lateness being reported to credit bureaus. In reading these posts, it appears that as of January 2011, BOA has suddenly taken to adding Escrows whenever they choose. We are taking steps to pay our mortgage early because we no longer want to deal with these idiots!
ww
w.
b. We were offered a modification in 2008 because Bank of America took over our home loan from Countrywide. I have had to resubmit paperwork 6 times and have been advised that they received my paperwork but everytime someone new would take over our file I was told they were missing documents. I would get another packet in the mail, resubmit and the same thing for 3 years. In 2010 I paid 29
St
op Fo
re
clo
su re
Fr au d. co
A few days later, we received a notice that our loan was in default. We had never missed a payment but we thought it may be related to the fact that we had been sending payments to Wiltshire and not BOA so they were arriving late as I could see on the statement that payments were being received. We corrected the online payment and figured it would self correct.
ww
I made 7 phone calls on Thursday 4/14/11 which is when I told Matt I would call him back because I needed to speak to my husband and no one would put me through to the extension I had reached him at before. Plus I got dropped about another 4 times from transfers other employees did. The letter said I needed to respond by April 18, 2011, so now today I am searching for a lawyer to help us. We did not ask for this, all we did fill out paperwork for a modification that they offered to us -- we did not request. I want to know why we were not notified that they were refunded the money they put out for our real estate taxes and continued to charge us for that payment in our escrow and why our mortgage was not adjusted to reflect the refund. I believe there is a level of fraudulent activities on behalf of Bank of America and from what I see in your list of complaints I am now the only one. Cant someone do something to stop them from these practices so this doesnt happen to anyone else. Who can we call at Bank of America -- to find a complaint line or hotline is impossible in that website and no one in the offices seems to want to help -- Does bank of america have that much money that they can afford to close on hardworking homeowners who have been diligent in
w.
St
op Fo
That the Real Estate Taxes they paid for $4,200 were refunded to them on December 23, 2010 and we figured out that BOA was still including those monies in this escrow they started in 2011. We also found out through one of their team members who casually said well I see you were declined in January they knew I wasnt going to get the modification in January they went ahead with the escrow and were charging us for the escrow they paid in 2010 (but was returned to them in December) and in addition, they were charging for what our normal escrow would be every month moving forward. So taxes and insurance would be around $520 a month, so they doubled that for the money they paid out in 2010 and charged us again for future escrow payments. On top of that because the mortgage payments they expected us to pay were 3777 I advised them we could not pay that amount. We were still paying our regular payment which they were accepting, but when I made my next months payment, they took a portion of that payment to cover the difference for the 3777 payment so they are now saying all of our payments are late and have put us on notice of being in default on our loan. I attempted to get in touch with Matt in the escrow department who was helping sort out the escrow mess CAUSED BY BOA and now every time I call they will not put me through to him to help me finally resolve these issues.
re
clo
30
su re
Fr au d. co
our taxes and HO insurance as we have for years because we never had an escrow. In January (3 years after we started the modification process) we received a statement BOA that indicated the increase in our payments due to an escrow shortage with our mortgage payments and so our payments were going from 2197 to 3777. I have talked to about 20 people since then and no one could give me a straight answer. They were telling me my loan was in underwriting. I said should I just cancel the request to modify they said no, it should be very soon. So I stayed on board in hopes that we might get a little help if nothing else. I worked constantly trying to get someone to help us. I found out from one of the Loan Modification personnel that I was declined for the modification in January, but did not receive notice until March.
c. 3/ 2010 i was approved for the loan mod. program with BofA since then they have lost paperwork repeatedly. I have had to requalify 4 or 5 times since 3/2010. I have mailed & faxed modification paperwork more times than I can count. I check back every couple of weeks and each time they tell me my case is under review, someone will contact you The only time I have been contacted was to say I was in foreclosure. When I call, no one at bofa has any idea what is going on with my loan. The ask me to requalify or resend docs, or send updated docs which I always do immediately. This last time, I had to start the whole process over in Feb because they had misplaced my file. After I was approved (again) and spending 30 minutes on the phone giving financials, they told me they would send a modify packet. I had to call 4 times before I finally received it. I mailed it in. After not hearing from them for 2 weeks I called. They did not have my docs. They told me to fax it. I did. twice. I spoke to evelyn, she assured me the docs were in and being reviewed. Since then I have checked in and spoken to numerous people who assured me I was under review. 3/10 I called to check, Reginald said they needed updated docs before they could go forward!! I immediately faxed the docs and called. Reginald assured me they were received. Today I called to check on the status & they told me they had nothing & I had to requalify again--to start all over! it has been over a year! jennifer of las vegas, NV March 25, 2011
ww
I maintained paying my mortgage payments on time. I continued to call about the loan modification papers and was always transfered from one department to another. I was a told over the phone that I could not get a modification being current with my mortgage. I remained current with my mortgage until Sept.2010. I filed a claim with BP for loss of income. More run around. Finally during Thanksgiving week, I received a payment from BP for $6100.00. The claim was for a loss of $15,000.00 for that quarter. I received no less than five calls a day from B of A asking when I was making a mortgage payment. Still no loan modification paperwork. I finally received paperwork from Collins Center for Loan Mediation. Those papers stated I was no longer able to use their services because I refused to meet 31
w.
St
op Fo
d. I notified B of A last June after the local oil spill that work had slowed down.Normally bringing in around $5000.00 a month, because of the BP oil spill the month of June was down to $347.00 for the month.I called B of A the first of June and they said they would send loan mod. papers. By the end of June, no papers. First of July I called them back. They stated they were behind on paperwork and I should get them soon.End of July,no paperwork.
re
clo
su re
Fr au d. co
paying their mortgage for years, paying their own insurance and taxes for years, and now are attempting to take away what you have worked so hard for your whole life for.
I talked with Bank Of America and they told me I was in the second stage of getting my loan modification. Days later I received a letter from an attorney for collections and foreclosure. I notified them (********) that I was waiting on a loan modification. They said foreclosure would continue while I was waiting on the modification. Days later I received a letter stating I had been turned down for the loan modification which was now in March of 2011. That paper stated I had three choices of handling of resolution. 1.Short Sale 2.A deed of Lieu 3.The Fannie Mae Deed- for- Lease
I dont feel Bank of America ever intended on helping me with my mortgage. Three years ago when my mortgage company was Countrywide, my home was valued at $369,000.00. Now Bank of America tells me it is worth $148,00.00. Now that we are six months behind in payments, we can never catch up for all the penalties. I think they want my home and it doesnt seem I can do anything about it. James of Santa Rosa Beach, FL March 16, 2011 e. My husband and I sold a house at 1462 South St. in Bridgewater, MA 12/6/02. A few months ago we started getting letters and phone calls from Bank of America saying we were in default and were in danger of foreclosure. We have spoken with several people at Bank of America all to no avail. They insist we owe them money. We have faxed our closing papers and they were still not satisfied. I went to the local Registry of Deeds and even found an entry showing the loan was paid off and they were still not satisfied. They have ruined our credit and continue to insist we owe them money on a house we sold 8 years ago. Do we have any recourse? We are having difficulty getting a loan on a car due to this issue. I feel there is fraud on the part of Bank of America but have no way to prove this.
ww
w.
Carmen of West Yarmouth, MA March 12, 2011 f. I have been trying to obtain a home loan modification since 11/09. I have gone through what so many other people have put on their posts to this website. It started with an initial call, requests for documents, a trial payment and period, numerous phone calls, denials, appeals and endless frustration.
St
op Fo
re
clo
32
su re
Fr au d. co
with their mediators. I called them and they said they had been trying to call me several times with no answer. They had been calling the wrong number, not mine. I told them how long I had been waiting for a loan modification but they said there was nothing they could do to change the situation because thirty days had passed and time was up.
g. Bank of America took over our mortgage a year and a half ago from Countrywide. We have had nothing but grief since. We have lived in our home for over seven years and have never missed a payment. When BOA took over we were suddenly behind in payments according to them. We have tried everything we can think of to find out what the problem is with them to no avail. They currently say we owe them over $4,300.00 dollars with no explanation for what it is for. They have now decided to start foreclosure proceedings against us. We cannot afford to get ans [sic] attorney and the ones we have talked to said they cannot help because [sic] BOA will just drown us in paper and it will cost too much to fight them. We even tried the loan modification route even though we do not feel we need to. We went through that six different times with, they have never done anything except say wrong paperwork or turned in too late One person, an Abigail even called me a deadbeat and said I should lose my home, and that Countrywide people are all deadbeats. What kind of treatmen [sic] is this? We are at our wits end with these morons, my wife and are no longer young and we do not wish to lose our home. Can any one out there help? Bank of America is no American bank, it is a digrace [sic] and should have gone under many years ago. We ar [sic] now in the process of trying to raise the $4,300.00 by raiding what is left of our meager retirement, even at that BOA says they may not even accept it, what kind of Bank is this? Crooked I say. We just made this months mortgage payment and they accepted it, so gives. Ernie of Gillette, WY March 10, 2011
h. Bank of Americas website clearly claims to call if you are behind or think you might fall behind on a mortgage payment. Not the case, after my wife called the number and was transferred to the default dept., the representative Thomas was told not to transfer her to another Dept. that might help because we were not behind yet.
ww
w.
i. Almost 2 years ago I applied for a modification, I have been asked to submit and resubmit the same paper work. They keep pushing it back asking for the same items again. I most recently have sent the same copies of the same items to 3 people in the last 2 months. Dawn of Bethlehem, PA Feb. 17, 2011 j. Due to fininancial [sic] hardship i had filed modification a year ago. with many attempts and phone calls i did not get any help but instead they have increase my monthy [sic] payment instead of reducing. 33
St
op Fo
re
clo
su re
Fr au d. co
Currently, the bank has sent me to foreclosure. My payments were on time when this whole process started. All I want is answers. It is so wrong what this bank is doing to so many people - there should be consequences.
I called the bank and a representative told me to call LA county tax for a refund, but county tax informed me that they had been credited to the bank. why would i have to pay back the bank when they already recd refund from tax collector. Jennifer of West Covina, CA Feb. 11, 2011
ww
so defective that even homeowners with no prior relationship with the Company have suffered. 34
w.
We are afraid that, even though we are told everything is fine, that BAC will start the foreclosure proceedings and we will lose our house FOR NO REASON. We have read about this happening to others who have mortgages with BAC. Albert of Egg Harbor City, NJ Jan. 21, 2011. Bank of Americas internal controls for its default loan management have become
74.
St
l. Over a year ago we inquired about a loan modification with BAC. After they lost our paperwork twice and gave us the run around on the phone, we told them we wanted to rescind our request. Ever since we did that, they have been sending us letters threatening foreclosure. We NEVER changed our payment amount - we paid the same payment that we always paid, never the temporary modification payment. We have NEVER paid our mortgage late. We have called many, many times and we keep getting cut off or told that everything is cleared up but then we get another letter. My husband & I are both elderly and the stress from this harrassment [sic] is taking its [sic] toll on our health.
op Fo
re
clo
I emailed the CEO and someone called me right away and promised it would be completed asap...this was back in approx Sept 2010. Husband is medically retired and just released again from the hospital, (4th time in 6 weeks) and his ucler [sic] is back...cant stand this much longer.
su re
k. Started the modification process in Sept. 09. Was told to pay 587. to show we were having a hardship and loan would be modified in 3 months and our good credit score of 700-800 would be restored upon revised loan. Numerous phone calls from credit agancies [sic] and threatening certified letters and threats of taking our house, after we did what they instructed us to do. This has been our stress for well over a year now. Late fees, etc now over $13,000 owed and our credit is no good.
Fr au d. co
the monthly increase are include property tax and insurance. I had informed the bank that i will paid the property tax direct to L.A County tax and I also purchased home insurance. They have send me letters said that my account is default but I paid my monthly mortage [sic] payment on time. (had never missed a payment) i have also paid the 1st installment of property tax this NOV/2010 which the bank claims that had paid as well.
with cash in 2009 in Naples, Florida found their home enmeshed in foreclosure proceedings
initiated by Bank of America in February 2010. The couple, who hired an attorney to defend their interests, sought their attorneys fees from the Company after it later abandoned the wrongful foreclosure. After multiple informal attempts to collect the fees, the couples attorney obtained judgment for the unpaid fees and a writ of execution to enforce the judgment against the Company. After he arrived at a local branch office with sheriffs deputies, who had instructions to seize cash from teller drawers, furniture, computers and other property, the branch manager produced a check to satisfy the writ and additional fees and costs. In a written statement, the
C. Investigations Into Servicing and Foreclosures and Moodys Servicer Quality Ratings of Bank of America, N.A.
number of other reports and investigations cast a critical spotlight on the Companys deficient default loan management internal controls. 76.
The COP issued its first report in March 2009 entitled Foreclosure Crisis:
ww
w.
a. [W]hen homeowners try to contact their servicers to request a modification, they are often unable to reach them. Homeowners often have to wait on the phone for hours to get through to a servicer representative at a call center. For working families in particular, the time involved in trying to contact the servicer can be prohibitive. Homeowners who are trying to deal with their mortgage during their lunch breaks or between two jobs often give up because they cannot get through to their servicers. b. [S]everal servicers have openly acknowledged that they simply were not prepared for the volume of loss mitigation requests that this crisis has generated.
St
op Fo
Working Toward a Solution, which explained problems within the residential mortgage loan
re
clo
75.
In addition to the FTCs investigation and later settlement with the Company, a
35
su re
Company did not accept responsibility for the incident, but instead placed blame on an outside
Fr au d. co
In a June 6, 2011 article, Time online reported that a married couple who had purchased a home
77.
Americas primary and special servicer quality ratings on review for possible downgrade. The rating action is due to two primary reasons: 1) irregularities in Bank of Americas foreclosure process which could result in delayed foreclosures and longer REO timelines, as well as legal challenges to previously completed foreclosures and reputational risk for the servicing operation and its corporate parent; 2) deterioration of the companys collections, loss mitigation and timeline performance metrics, as well as relatively low levels of modification activity and high modification re-default rates on loans in Bank of America serviced RMBS. Moodys further explained that its servicer quality ratings represent its view of a servicers ability to prevent or
maintain its focus on high quality servicing in an economic downturn. 78. The COP issued another report in November 2010 entitled Examining the
and State attorneys general who claim that homeowners have suffered improper foreclosures. The report also states that [e]ven the prospect of such losses could damage a banks stock price or its ability to raise capital.
Report Through November 2010, the U.S. Treasury Department observes that the conversion rate
ww
This excerpt quotes testimony from Anne Balcer Norton, Esq., Director, Foreclosure Prevention, St. Ambrose Housing Aid Center, Inc. She also commented that the current crisis demands clear objectives and precise strategies employed by servicers to engage in loss mitigation. Such strategies are complicated by the prevailing servicing guidelines and threats of litigation by investors. 36
w.
St
79.
op Fo
This report observes that banks and loan servicers are vulnerable to litigation by homeowners
re
clo
mitigate asset pool losses across changing markets and also consider the companys ability to
su re
Fr au d. co
c. Servicers either lack the staffing to effectively respond to loss mitigation requests or have artificially ramped up capacity at a level that precludes training and oversight of staff.4 d. It is difficult for homeowners to initiate productive discussions with lenders because many servicers lack the capacity to deal with a large volume of modifications.
the report shows that through October 2010, Bank of Americas foreclosure starts and
completions, as a percentage of the total for the eight largest servicers that canceled HAMP trial modifications, was the third highestover 20%. 80.
On November 23, 2010, the Financial Stability Oversight Council held an open At that meeting,
session meeting chaired by Secretary of the Treasury Timothy Geitner. Assistant Treasury Secretary Michael Barr stated, in part, as follows:
ww
The foreclosure working group has five key objectives: determining the scope of problems; holding the Companies accountable for fixing these problems; making sure individuals who have been harmed are given redress, and that firms pay penalties where appropriate for their actions; getting the mortgage servicing industry to do a better job for households in financial difficulty by providing alternatives to foreclosure; and acting in a coordinated and comprehensive way to hold the firms accountable, bring clarity and certainty, and help households. There are five key areas under review at this time: First, foreclosure process; second, loss mitigation; third, origination putbacks; fourth, securitization trusts; and, lastly, disclosures. Reviews are ongoing, and we expect to report back to the council at its January meeting with initial findings. In the interim, let me make a couple of key points. First, we are working to bring clarity and certainty as quickly as we can, but reviews will take time; and second, the bulk of the examination work to date focused on the foreclosure process has found widespread and, in our judgment, inexcusable breakdowns in basic controls in the foreclosure process. These problems must be fixed. Let me provide a brief overview of the extent of the reviews. Earlier this fall, we formed a foreclosure task force at your request in which 11 federal agencies, including the relevant FSOC [Financial Stability Oversight Council] entities, plus the FTC, the Department of Justice and the Department of Housing and Urban Development have been and are coordinating investigations of the largest mortgage servicers, key service providers such as LPS and MERS, certain law firms and other matters. The working group is also coordinating closely with the states, both the attorney generals and state bank regulators. Regulators are conducting on-site foreclosure exams of the largest mortgage servicers. The exams are designed to test and verify the adequacy and integrity of bank assessments and corrective actions, governance over foreclosures to ensure foreclosures are completed in accordance with applicable legal requirements, and that affidavits and claims are accurate, and to determine whether troubled borrowers were properly considered for loss mitigation activities, such as loan modifications prior to foreclosure. The scope of work to assess foreclosure governance is extensive, and includes an assessment of each servicers foreclosure policies and procedures, organizational structure and staffing, vendor management, quality control, loan documentation, including custodial management and foreclosure processes.
w.
St
op Fo
re
clo
37
su re
Fr au d. co
was just 29%, which was the third worst rate among 17 large mortgage servicers. In addition,
81.
the Federal Reserve, testified before the Senate Committee on Banking, Housing, and Urban Affairs. He said that preliminary findings from the Federal Reserves banking examiners
practices as underlying factors contributing to the problems associated with mortgage servicing and foreclosure documentation. We have also found shortcomings in staff training, coordination among loan modification and foreclosure staff, and management and oversight of third-party
ww
service providers, including legal services. As a result, he concluded that these widespread
w.
St
op Fo
Examiners are also conducting interviews with personnel and reviewing samples of individual borrower foreclosure files from all 50 states that include both inprocess and completed foreclosures. Examiners are expected to complete on-site fieldwork by the end of the year. Once this fieldwork is completed, regulators will aggregate results across institutions to ensure consistency, prepare supervisory letters, and determine supervisory actions that may be needed. The regulators will draft a horizontal foreclosure report that identifies the range of industry foreclosure practices and common foreclosure governance, and control weaknesses that need remediation. The regulators are targeting to complete this work by late January. In addition to reviewing the foreclosure process, there are also ongoing reviews for compliance with loss mitigation procedures, including intensive reviews with respect to modifications by both FHA and the Treasury Department. Separate and apart from these foreclosure and modification violations, servicers may face risks from failure to follow investor guidelines for originating loans during the height of the boom. Origination putbacks at relatively large scale have been occurring for some time, and will likely continue for several years. There have also been concerns raised regarding whether documentation problems exist with respect to loans in securitization trusts. Regulators have begun to review compliance by servicers, custodians and trustees with procedures required by pooling and servicing agreements, trust in custodial agreements and related contracts. In late October, with respect to disclosure, the SEC issued a letter to major institutions to remind them of their disclosure obligations, in light of concerns about potential risks and costs associated with mortgage and foreclosure-related activities or exposures. In sum, Chairman, major financial institutions are being reviewed for problems across a wide range of issues in foreclosure processing, loss mitigation, origination putbacks, securitization trusts and disclosure requirements. These reviews are ongoing, and the foreclosure task force will report back to this council at its January meeting.
re
clo
38
su re
Fr au d. co
before the Senate Committee on Banking, Housing, and Urban Affairs, stating that the reported foreclosure improprieties represent a serious operational breakdown in foreclosure governance and controls that national banks should maintain. He also noted that on September 29, 2010, the OCC ordered the eight largest national bank servicers, including Bank of America, to conduct a comprehensive self assessment of their foreclosure management processes, including file review and affidavit processing and signature. 83.
Comptroller of the Comptroller of the Currency, testified before the House Committee on the Judiciary. Identifying Bank of America as among the eight largest national bank mortgage loan servicers, she also noted that six unidentified large bank servicers have publicly acknowledged deficiencies in their foreclosure processes. The lapses that have been reported represent a serious operational breakdown in foreclosure governance and controls that national banks should maintain. She cited a number of breakdowns in the foreclosure processes of the large mortgage loan servicers, including about whether the appropriate affidavits were signed if required under state law; whether notaries violated standard procedures (e.g., notarizing documents after they had been signed); and the overall accuracy of information and existence of proper documentation to support a foreclosure proceeding. 84.
In its December 2010 Report, the COP specifically identified Bank of America as a
servicer with a relatively low rate of converting trial modifications to permanent modifications.
ww
He also noted a number of possible reasons for the explosion of foreclosures, including the lack of servicer capacity to execute modifications, purported financial incentives for servicers to foreclose rather than modify, what until recently appeared to be easier execution of foreclosures relative to modifications, limits on the authority of securitization trustees, and conflicts between primary and secondary lien holders. 39
w.
Among the top servicers, for example, Wachovia Mortgage and HomeEq Servicing have
St
op Fo
re
clo
su re
On December 2, 2010, Julie L. Williams, Chief Counsel and First Senior Deputy
Fr au d. co
issues suggest structural problems in the mortgage servicing industry and that it has not been
quality ratings as a primary and/or special servicer of prime residential, second lien residential and subprime residential mortgage loans. As Moodys explained, [t]he downgrade was mainly due to the deterioration of the companys collections and loss mitigation metrics 86.
government-insured servicer quality rating as primary servicer of government insured residential mortgage loans. Moodys explained that [t]he company did not provide FHA/VA claims data
D.
Admissions, Disclosures and Adverse Consequences of Foreclosure Irregularities. 87. On November 18, 2010, Rebecca Mairone, Default Servicing Executive of Bank
of America Home Loans, submitted written testimony to the House Financial Services Housing and Community Opportunity Subcommittee. Excerpts from her statement admit that Bank of America has been wracked with foreclosure irregularities: After concerns emerged at other lenders regarding the foreclosure affidavit in judicial foreclosure states, Bank of America and its servicing subsidiary initiated a review of our foreclosure procedures. On October 1, we voluntarily suspended foreclosure judgments in the 23 judicial foreclosure states while we completed this review. One week later, we paused foreclosure sales nationwide as we launched a voluntary review of our foreclosure process in all 50 states. Every affidavit will be individually reviewed by the signer, properly executed, and promptly notarized. We are carefully restarting the affidavit process with these controls in place. We are working to replace previously filed affidavits in as many as 102,000 pending foreclosure cases that have not yet gone to judgment. Further, with regard to both judicial and non-judicial states, we are implementing new procedures for selecting and monitoring outside counsel.
number of state court systems that had proactively examined lender foreclosure practices
ww
concluded that action needed to be taken to protect the integrity of the judicial process. Bank of America/BAC Home Loan Servicing LP suffered the consequences.
w.
88.
St
op Fo
re
clo
40
su re
Fr au d. co
conversion rates of 89 percent and 95 percent respectively. In contrast, Bank of Americas rate
order entered by the Chief Administrative Judge of the state courts of New York, the plaintiffs in
all pending residential mortgage foreclosure actions were required to submit an affirmation from their attorneys affirming that he or she has inspected all documents and that such documentation was correct and accurate. 90. of steps
On December 20, 2010, the New Jersey court system, sua sponte, took a number which, according to a press release issued that day (available at
http://www.judiciary.state.nj.us/superior/press_release.htm), were intended to protect the integrity of filings of foreclosures in New Jersey. On that day, the New Jersey courts issued
lenders and service providers who have been implicated in irregularities in connection with their foreclosure practices to show cause why the processing of uncontested residential mortgage foreclosure actions they have filed should not be suspended.6 Bank of America was among the six lenders given such notice. In a second order, a judge issued an administrative order that details the scope of the problem and orders certain procedures to safeguard the mortgage foreclosure documentation preparation and filing process. The press release notes that this second order requires 24 lenders and service providers who have filed more than 200 residential foreclosure actions in 2010 to demonstrate affirmatively that there are no irregularities in their handling of foreclosure proceedings, via submissions to a special master. 91. The New Jersey courts administrative order specifically called out Bank of
America as one of six institutions with robo-signing activities that the order noted were pervasive problems in foreclosure and bankruptcy filings in the state courts. As the order put
ww
See In the Matter of Residential Mortgage Foreclosure Pleading and Document Irregularities, Superior Court of New Jersey, Chancery Division-General Equity Part, Mercer County, Docket No. F-059553-10. 41
w.
it, [r]obo-signers are mortgage lender/servicer employees who sign hundredsin some cases
St
op Fo
re
clo
su re
two orders. As the press release stated, in the first order to show cause, a judge directed six
Fr au d. co
89.
In New York, for example, in an October 20, 2010 sua sponte administrative
improper notarizing practices or document backdating. With respect to Bank of America, the administrative order stated:
As the robo-signing issue drew national attention, a deposition implicating Bank of America came to light, suggesting that Bank of America foreclosed on homes with the aid of documents executed en masse, in the absence of due diligence, by people with no knowledge of the information contained in the documents and no experience in the financial services or mortgage processing industry. 92.
On January 5, 2011, Bank of America d/b/a BAC Home Loan Servicing LP filed
a response to the December 20, 2010 order to show cause. Its response informed the court that as of January 3, 2011, Bank of America had 20,522 foreclosure proceedings pending in New
had not yet been conducted. Bank of America stated that it would implement enhanced processes for preparing foreclosure affidavits and for evaluating and managing outside foreclosure counsel and that it would prepare and file new affidavits of indebtedness in all pending foreclosure cases in New Jersey. 93.
Bank of America has suffered similar impacts in many other states from its highly
Complaints and Demands from Institutional Shareholders. 94. On October 18, 2010, a group of institutions with ownership interests in certain
residential mortgage-backed securities issued by Countrywide sent a demand letter to Countrywide alleging that it failed to comply with its obligations under the Pooling Service
Countrywide:
ww
w.
a. Failed to maintain accurate and adequate loan and collateral files in a manner consistent with prudent mortgage servicing standards; b. Failed to demand that sellers cure deficiencies in mortgage records when deficient loan files and lien records are discovered; c. Exacerbated losses experienced by the Trusts;
St
Agreements applicable to such securities. Among other things, the institutions alleged that
op Fo
re
flawed process to document its loans and transfers of ownership interests, as well as the
clo
42
su re
Jersey, including 2,111 proceedings in which a judgment of foreclosure was entered but a sale
Fr au d. co
knowledge of the information contained in the affidavits. Robo-signing may also refer to
95.
Stockholder Proposal to be transmitted to Bank of Americas Deputy General Counsel and Corporate Secretary. The Stockholder Proposal called for the Companys Audit Committee to conduct an independent review of the Companys internal controls related to loan modifications, foreclosures and securitizations, and report to shareholders, at reasonable cost and omitting proprietary information, its findings and recommendations by September 30, 2011. Liu asked
and (ii) its own policies and procedures; (b) whether management allocated a sufficient number of trained staff; and (c) policies and procedures to address potential financial incentives to foreclose when other options may be more consistent with the Companys long-term interests. 96. On January 6, 2011, Liu sent a letter to the Companys Board. He urged that the
Audit Committee immediately retain independent advisors to review the Companys internal controls related to loan modifications, foreclosures, and securitizations. Liu stated that such a review should evaluate (a) the Companys compliance with (i) applicable laws and regulations and (ii) its own policies and procedures; (b) whether management has allocated a sufficient number of trained staff; and (c) policies and procedures to address potential financial incentives to foreclose when other options may be more consistent with the Companys long-term interests. He added that we do not consider your existing audit firm to be independent since the firm previously signed off on the Companys internal controls.
to the SEC requesting confirmation that the Staff of the Division of Corporation Finance (the
ww
Division) will not recommend enforcement action if the [Company] omits from its proxy
7
Liu spearheads efforts by a coalition of seven major public pension systems, which collectively hold 97.1 million shares of Bank of America common stock valued at $1.3 billion. 43
w.
97.
St
Four days later, on January 10, 2011, the Companys outside counsel sent a letter
op Fo
re
clo
su re
that the report evaluate (a) the Companys compliance with (i) applicable laws and regulations
Fr au d. co
d. Incurred wholly avoidable and unnecessary servicing fees and servicing advances to maintain mortgaged property, all as a direct result of the Master Servicers deficient record-keeping; and e. Prejudiced the interests of the Trusts and the Certificate holders in the mortgages by fostering uncertainty as to the timely recovery of collateral.
receipt of Lius proposal advising him the Audit Committee would respond promptly following due consideration. Liu, however, received no such response. 99.
The SEC responded to the Companys January 10, 2011 request as follows: The first proposal requests that the board have its audit committee conduct an independent review of the companys internal controls related to loan modifications, foreclosures, and securitizations, and to report to shareholders its finding and recommendations [.] We are unable to concur in your view that Bank of America may exclude the first proposal under rule 14a-8(i)(7). That provision allows the omission of a proposal that deals with a matter relating to the companys ordinary business operations. In view of the public debate concerning widespread deficiencies in the foreclosure and modification processes for real estate loans and the increasing recognition that these issues raise significant policy considerations, we do not believe that Bank of America may omit the first proposal from its proxy materials in reliance on rule 14a-8(i)(7). We are unable to concur in your view that Bank of America may exclude the first proposal under rule 14a-8(i)(10). Based on the information you have presented, it appears that Bank of Americas practices and policies do not compare favorably with the guidelines of the first proposal and that Bank of America has not, therefore, substantially implemented the first proposal. Accordingly, we do not believe that Bank of America may omit the first proposal from its proxy materials in reliance on rule 14a-8(i)(10).
Accordingly, Lius stockholder proposal entitled Proposal 7: Mortgage Servicing Operations was included in the Companys March 30, 2011 Proxy. F. The Servicer Settlement Demand and Rejection by the Company. 100. On or about March 3, 2010, Bank of America received a comprehensive settlement term sheet from various federal and state authorities, including state attorneys general, the Justice
Trade Commission and the Department of Housing and Urban Development, related to its
ww
servicing of owner-occupied properties serving as the primary residence of borrowers (the Servicer Settlement Demand).
w.
St
op Fo
re
clo
44
su re
Fr au d. co
materials for the [Companys] 2011 Annual Meeting of Stockholders the proposals[,]
ww
a. standards for affidavits and sworn statements in foreclosure and bankruptcy proceedings; b. requirements for accuracy and verification of borrowers account information; c. documentation of note, holder status, and chain of assignment; d. quality assurance systems/audits; e. specific loss mitigation requirements, including: the affirmative duty to thoroughly evaluate borrowers for all available loss mitigation options before foreclosure referral; prohibition of dual tracking trial modifications and foreclosures; providing a single point of conduct to borrowers; accuracy of loss mitigation communications with borrowers; independent review of loss mitigation denials; f. general loss mitigation requirements, including: (1) maintenance of adequate staffing and systems for tracking borrower documents and information that are relevant to foreclosure, loss mitigation, bankruptcy, and other servicer operations; (2) maintenance of adequate staffing and caseload limits for employees responsible for handling foreclosure, loss mitigation, bankruptcy, and related communications with borrowers and housing counselors; (3) establishment of reasonable minimum experience, educational and training requirements for loan modification staff; (4) electronic documentation of each action taken on a foreclosure, loan modification, bankruptcy, or other servicing file, including all communications with the borrower and other parties; (5) adoption of incentives and compensation plans that encourage appropriate loss mitigation over foreclosure; (6) prohibition against making inaccurate payment delinquency reports to credit reporting agencies when borrowers are making timely reduced payments pursuant to a trial or other loan modification agreement; (7) prohibition against instructing, advising, or recommending that borrowers go into default in order to qualify for loss mitigation relief; and (8) prohibition against discouraging borrowers from working or communicating with legitimate non-profit housing counseling services; g. consideration and application of, where appropriate, principal reduction loan modifications; h. provision of loan modifications, including principal reductions, related to second liens; i. general requirements for servicing fees, including: (1) that such fees be bona fide and reasonable, and disclosed to borrowers;
w.
St
op Fo
re
clo
45
su re
Fr au d. co
101. The Servicer Settlement Demand outlines a comprehensive set of remedial steps,
102. On March 28, 2011, Bank of America responded to the Servicer Settlement Demand with a counterproposal entitled Draft Uniform Servicing Standards. The Companys offer, however, rejected many key parts of the settlement demand, and remained silent about and thus implicitly rejectedmany other remedies set forth in the Servicer Settlement Demand,
ww
Federal Deposit Insurance Corporation, and the Office of Thrift Supervision conducted an indepth interagency review of the Companys foreclosure policies and practices.
w.
The Results of the Fourth Quarter 2010 Interagency Review. 103. During the fourth quarter of 2010, the Federal Reserve System, the OCC, the
St
including principal reduction loan modifications, second liens and conflicts of interest, in-
op Fo
re
(2) prohibition of default, foreclosure-related, or bankruptcy-related fees while a completed loan modification application is under consideration or being performed as a trial modification; and (3) prohibition of mark-ups on any third-party fees. j. specific servicer fee provisions, including: (1) maintenance of a current schedule of standard or common fees (e.g., nonsufficient fund fees) that is available to borrowers upon request; (2) collection of fees from borrowers only for reasonable and necessary services actually rendered and fee is expressly authorized and clearly disclosed to borrower, or fee is expressly permitted by law and not prohibited by the loan instrument, or fee is not prohibited by law or loan instruments and is reasonable for a specific service requested by the borrower; (3) attorneys fees charged are for work actually done; (4) with respect to late fees, prohibitions of pyramiding, restrictions on attempts to collect late fees, and prohibitions of late fees when the borrower makes timely trial modification payments; k. restrictions on third party fees; l. restrictions on force-placed insurance; m. prohibition against engaging in unfair or deceptive business practices or misrepresenting or omitting any material information in connection with the servicing of the loan (including, but not limited to, misrepresenting the amount, nature or terms of any fee or payment due or claimed to be due on a loan, the terms and conditions of the servicing agreement, loss mitigation options, or the borrowers obligations under the loan); and n. adoption of enhanced corporate governance procedures to monitor compliance with the settlement that could include establishment of a compliance committee of the board of directors.
clo
46
su re
Fr au d. co
public in the OCC Consent Order. With respect to the Companys wholly-owned subsidiary, Bank of America N.A. Charlotte, NC, the OCC stated its findings in the OCC Consent Order, inter alia, as follows:
105.
inadequate procedures, policies, resources, and controls pertaining to the Companys default loan management functions, they neither admitted nor denied the above findings.
ww
inadequate procedures, policies, resources, and controls pertaining to its default loan 47
w.
106.
St
(1) The Bank is among the largest servicers of residential mortgages in the United States, and services a portfolio of 13,500,000 residential mortgage loans. During the recent housing crisis, a substantially large number of residential mortgage loans serviced by the Bank became delinquent and resulted in foreclosure actions. The Banks foreclosure inventory grew substantially from January 2009 through December 2010. (2) In connection with certain foreclosures of loans in its residential mortgage servicing portfolio, the Bank: (a) filed or caused to be filed in state and federal courts affidavits executed by its employees or employees of third-party service providers making various assertions, such as ownership of the mortgage note and mortgage, the amount of the principal and interest due, and the fees and expenses chargeable to the borrower, in which the affiant represented that the assertions in the affidavit were made based on personal knowledge or based on a review by the affiant of the relevant books and records, when, in many cases, they were not based on such personal knowledge or review of the relevant books and records; (b) filed or caused to be filed in state and federal courts, or in local land records offices, numerous affidavits or other mortgage-related documents that were not properly notarized, including those not signed or affirmed in the presence of a notary; (c) litigated foreclosure proceedings and initiated non-judicial foreclosure proceedings without always ensuring that either the promissory note or the mortgage document were properly endorsed or assigned and, if necessary, in the possession of the appropriate party at the appropriate time; (d) failed to devote sufficient financial, staffing and managerial resources to ensure proper administration of its foreclosure processes; (e) failed to devote to its foreclosure processes adequate oversight, internal controls, policies, and procedures, compliance risk management, internal audit, third party management, and training; and (f) failed to sufficiently oversee outside counsel and other third-party providers handling foreclosure-related services.
Even though the Individual Defendants had long known of the Companys
Even though the Individual Defendants had long known of Bank of Americas
op Fo
re
clo
su re
Fr au d. co
104.
On April 13, 2011, the results of this review and the OCCs findings were made
Consent Order. Further, they have failed to compensate the Company for damages caused by their wrongdoing and have refused to seek remedies against anyone else who was responsible for the misconduct alleged herein. 107.
On the same day that Bank of America entered into the OCC Consent Order, it
also entered into a consent order with the Federal Reserve (the Federal Reserve Consent Order) 8 reciting, in part:
WHEREAS, the Bank and the OCC have entered into a consent order to address areas of weakness identified by the OCC in loan servicing, Loss Mitigation,9 foreclosure activities, and related functions;
108.
The Federal Reserve Consent Order requires that the Board ensure the
Companys compliance with the OCC Consent Order and to submit to the Federal Reserve within 60 days:
ww
In the Matter of BANK OF AMERICA CORPORATION Charlotte, North Carolina, Docket No. 11-029-B-HC. 9 The Federal Reserve Consent Order defines Loss Mitigation to collectively mean foreclosure proceedings and loss mitigation activities involving nonperforming residential mortgage loans, including activities related to special forbearances, repayment plans, modifications, short refinances, short sales, cash-for-keys, and deeds-in-lieu of foreclosure[.] 48
w.
St
(a) a written plan to strengthen the boards oversight of the Companys enterprisewide risk management (ERM), internal audit, and compliance programs concerning the residential mortgage loan servicing, Loss Mitigation, and foreclosure activities conducted through the bank; (b) an acceptable written plan to enhance the Companys ERM program with respect to its oversight of residential mortgage loan servicing, Loss Mitigation, and foreclosure activities and operations; (c) an acceptable written plan to enhance the Companys enterprise-wide compliance program (ECP) with respect to its oversight of residential mortgage loan servicing, Loss Mitigation, and foreclosure activities and operations; and (d) an acceptable written plan to enhance the internal audit program with respect to residential mortgage loan servicing, Loss Mitigation, and foreclosure activities and operations.
op Fo
re
clo
su re
WHEREAS, in the consent order, the OCC has made findings, which the Bank neither admitted nor denied, that there were unsafe or unsound practices with respect to the manner in which the Bank handled various foreclosure and related activities. The OCCs findings also raised concerns that BAC did not adequately assess the potential risks associated with these activities;
Fr au d. co
management functions, they also did not take curative action until forced to do so pursuant to the
H.
The May 11, 2011 Shareholder Meeting and False and Misleading Proxy. 109. Bank of Americas annual meeting of shareholders occurred on May 11, 2011, the
Defendants caused the Company to first publish the Proxy. The Proxy sought shareholder action on a number of items, including, inter alia, the following: a. b. c. compensation; d. election of directors;
by Liu on behalf of the City of New Yorks Comptrollers Office, as Custodian/Trustee of the
the New York City Teachers Retirement System and the New York City Police Pension Fund
ww
shareholder proposal, which was included in the Proxy as Proposal 7. The Boards March 30,
2011 recommendation this proposal is summarized as follows: The Board recommends a vote AGAINST Proposal 7 for the following reasons: 49
w.
110.
St
The report should evaluate (a) the Companys compliance with (i) applicable laws and regulations and (ii) its own policies and procedures; (b) whether management has allocated a sufficient number of trained staff; and (c) policies and procedures to address potential financial incentives to foreclose when other options may be more consistent with the Companys long-term interests. The Board recommended that shareholders vote no with regard to Lius
op Fo
Resolved, shareholders request that the Board have its Audit Committee conduct an independent review of the Companys internal controls related to loan modifications, foreclosures and securitizations, and report to shareholders, at reasonable cost and omitting proprietary information, its findings and recommendations by September 30, 2011.
re
and as custodian of the New York City Board of Education Retirement System, which sought
clo
New York City Employees Retirement System, New York City Fire Department Pension Fund,
su re
Fr au d. co
date of which had been publicly disclosed since as early as March 30, 2011, when the Director
- we actively manage the loan modification and foreclosure processes to ensure that we have strong internal controls over our mortgage service operations;
- we have been a leader in providing foreclosure alternatives, assisting homeowners and constituent groups to resolve home loan issues through loan modifications or other solutions where possible; and - our company has already provided extensive public disclosure regarding the requested information, which makes the report sought by the proposal unnecessary. 111.
One day before the Company issued its Proxy, on March 29, 2011, Individual
Defendants Bies, Bramble, Colbert, Gifford, Holliday, Jones, Lozano, May, Moynihan, Powell, Rossotti, and Scully executed the OCC Consent Order. No disclosure of that fact, however, was
112.
On April 14, 2011only three months after he urged the Board to have the Audit
foreclosures and securitizationsJohn Liu, the New York City Comptroller, sent a letter to Bank of America shareholders urging them to vote FOR Proposal #7 at the Bank of America (BoA) Annual Meeting of Shareholders on May 11, 2011. He added that [t]he proposal calls on the audit committee of the board of directors to conduct an independent review of BoAs internal controls related to loan modifications, foreclosures and securitizations and to issue a report to
proposal in November 2010 a group of institutional shareholders with 97 million BoA shares sent a letter dated January 6th urging BoAs audit committee to immediately conduct an independent review of BoAs mortgage-related controls. Management confirmed receipt in a
ww
January 28th letter advising that the audit committee would respond promptly following due consideration, but no such response was received. 50
w.
St
op Fo
re
clo
su re
Fr au d. co
- our company has already taken significant steps to ensure that appropriate internal controls are in place, including additional controls and processes we have implemented following a comprehensive self-assessment of our foreclosure processes, as well as an environment of heightened regulatory scrutiny by state and federal authorities, including certain bank supervisory authorities;
Moynihan, Powell, Rossotti, and Scullywho together constitute a majority of the Board executed the OCC Consent Order on behalf of Bank of America, N.A. on March 29, 2011. The
remaining Director Defendant (Boardman) who had not so executed the OCC Consent Order was provided with or had unlimited access to copies of it well in advance of the May 11, 2011 annual meeting of Bank of America shareholders. In addition, with respect to the Federal Reserve Consent Order, the General Counsel of Bank of America was duly authorized by the Director Defendants to execute the Federal Reserve Consent Order on behalf of the Company on April 13, 2011. As such, all of the Director Defendants had the ability and ample opportunity to cause the
Proxy. 114.
misrepresented and/or omitted material facts, including material information concerning the fact that Bank of America and its wholly-owned subsidiary, Bank of America, N.A. had entered into the above-noted consent orders; that they had been executed or approved by specific members of the Board constituting the majority of the directors; that the OCC had made many adverse findings concerning the Companys defective default loan management internal processes and controls; that Bank of America agreed in the OCC Consent Order to various improvements in such internal controls and processes, including the formation of a new committee of the Board called the Compliance Committee; and that Bank of America agreed in the Federal Reserve Consent Order: (a) to submit a variety of written plans to the Federal Reserve for its approval concerning, inter alia, strengthening the Boards oversight of the Companys enterprise-wide
loan servicing, Loss Mitigation, and foreclosure activities conducted through Bank of America,
ww
N.A.; (b) upon approval by the Federal Reserve of such written plans, to cause the Companys adoption and implementation of them; and (c) to submit regular written detailed progress reports concerning steps taken to secure compliance with the order to the Federal Reserve. 51
w.
risk management, internal audit, and compliance programs concerning the residential mortgage
St
op Fo
re
clo
su re
Company to issue a revised Proxy in order to prevent the issuance of a false and misleading
Fr au d. co
113.
from the Proxy made various statements therein materially false and misleading, including,
without limitation, the Proxys characterization of the shareholder proposal submitted by Liu, and the Boards recommendation to shareholders that the proposal was not needed because our company has already taken significant steps to ensure that appropriate internal controls are in place and our company has already provided extensive public disclosure regarding the requested information, which makes the report sought by the proposal unnecessary. 116.
The OCCs findings regarding Bank of America, N.A.s deficient loan default
management controls and processes in the Consent Order were material to shareholders who
and who were considering whether the compensation policies for and amounts provided to the Companys directors and officers were appropriate in light of such omitted facts. With regard to executive compensation, the Proxy asserted that [w]e believe that Bank of America applies prudent risk management practices to its incentive compensation programs across the enterprise. Our Compensation and Benefits Committee is committed to a compensation governance structure that effectively contributes to our companys broader risk management policies. The Proxy noted that in 2010, the Company had adopted a Compensation Governance Policy that was designed to be consistent with global regulatory initiatives so that incentive compensation plans do not encourage imprudent risk-taking. Absent disclosure in the Proxy of the OCC and Federal Reserve Consent Orders, however, shareholders had no reasonable opportunity to evaluate these and other assertions regarding the appropriateness and soundness of the Companys compensation policies. I. The Offer to Settle With State Attorneys General
ww
Bloomberg reported that Bank of America and four other U.S. mortgage servicers proposed
paying $5 billion to settle a probe of their foreclosure practices by state and federal officials.
w.
117.
St
On May 11, 2011, the same day of the Companys annual shareholder meeting,
op Fo
re
clo
52
su re
were considering whether to elect the directors who were directly responsible for such problems,
Fr au d. co
115.
The omission of the OCC Consent Order and Federal Reserve Consent Order
drew criticism from banks opposed to a deal that would reduce principal amounts for borrowers. 119. 120.
The $5 billion would reportedly be used, in part, to pay for principal write downs. In comparison, the Consumer Financial Protection Bureau estimated that Bank of
America alone has improperly avoided well over $5 billion in servicing costs during 2007 through the third quarter 2010. J.
Federal Audits Accuse Five Biggest Mortgage Firms Of Defrauding Taxpayers [EXCLUSIVE]
According to the article, [t]he audits conclude that the banks effectively cheated
taxpayers by presenting the Federal Housing Administration with false claims: They filed for federal reimbursement on foreclosed homes that sold for less than the outstanding loan balance using defective and faulty documents. 123.
Bank of America finds that the company the nations largest handler of home loans failed to correct faulty foreclosure practices even after imposing a moratorium that lifted last October. The Justice Department is now contemplating whether to use the HUD audits as a basis for civil and criminal enforcement actions, the sources said. The False Claims Act allows the government to recover damages worth three times the actual harm plus additional penalties. 124.
steps to remedy its defective internal controls over default loan management processes, reports from governmental authorities continue to show that such assurances ring hollow. For example,
ww
on May 19, 2011, the Attorney General of the State of Utah sent a letter to defendant Moynihan informing him that ReconTrust Company, N.A. (a wholly-owned subsidiary of Bank of America, N.A.) was not in compliance with Utah and federal law when conducting real estate foreclosures 53
w.
St
Despite assurances from Bank of America that it has taken affirmative, proactive
op Fo
re
The May 16, 2011 Huffington Post article further reported that [t]he audit on
clo
su re
that investigations conducted by the Department of Housing and Urban Developments inspector
Fr au d. co
118.
As reported, the original settlement proposal offered by state and federal agencies
you notice that the Utah Attorney Generals office intends to enforce Utahs statutes against
those conducting business in Utah, and that includes enforcement of the real estate trustee qualification statute. And a May 25, 2011 article in Bloomberg online reported that the
Connecticut Attorney General said that the Company is failing to devote adequate resources to its mortgage-servicing business in the state and that [m]ortgage borrowers seeking help are experiencing significant difficulties with the bank. 125.
Washington Post reported that because Bank of America failed to meet basic HAMP
that program until it made improvements in its performance. The Company, along with several other large banks, was found to have failed to meet basic HAMP requirements, including the need to properly contact borrowers. The article noted that the Company had issued a statement vaguely acknowledging that it needed to make improvements in key areas, but asserting that it had made great strides. 126.
On June 9, 2011, the U.S. Treasury published the April 2011 Making Home
Affordable Report and Servicer Assessments For First Quarter 2011. This reported stated, in part: (a) Bank of America, NA has areas requiring substantial improvement[;] (b) After considering all relevant factors, Bank of America, NA servicer incentives will be withheld at this time[;] and, (c) Permanent reductions of incentives may commence in subsequent quarters if Bank of America, NA fails to demonstrate improvement. 127.
report states with respect to Internal Controls for Homeowner Evaluation and Assistance and
ww
Internal Controls for Program Management, Reporting, and Governance: benchmark; moderate improvement needed. VI. DAMAGES TO BANK OF AMERICA 54
w.
Contacting Homeowners: Did not meet benchmark; substantial improvement needed. The
St
The above report also stated with respect to Internal Controls for Identifying and
op Fo
re
clo
su re
requirements, it would no longer receive federal government payments tied to its participation in
Fr au d. co
in the State of Utah. As the Attorney General explained, [t]he purpose of this letter is to give
Bank of America faces substantial penalties, fines and related costs from its
misguided efforts to save money by under-investing in an adequate infrastructure to service its troubled loans. In a February 14, 2011 document entitled perspectives on Settlement
Alternatives in Mortgage Servicing prepared by the Consumer Financial Protection Bureau,10 the Bureau stated [r]ough estimates suggest that the largest servicers may have saved more than $20 billion through under-investment in proper servicing during the crisis. As a result, a notional penalty of roughly $5 billion would seem too low. And as reported by Reuters on April 14,
U.S. banks foreclosures over the past few years will help regulators determine the fines banks will have to pay for mortgage servicing abuses.11 130.
Bank of Americas Form 10-K for fiscal year 2010 also outlines the extent of
some of the damages faced by the Company as follows: We temporarily suspended our foreclosure sales nationally in the fourth quarter of 2010 to conduct an assessment of our foreclosure processes. Subsequently, numerous state and federal investigations of foreclosure processes across our industry have been initiated. Those investigations and any irregularities that might be found in our foreclosure processes, along with any remedial steps taken in response to governmental investigations or to our own internal assessment, could have a material adverse effect on our financial condition and results of operations. *** Law enforcement authorities in all 50 states and the U.S. Department of Justice and other federal agencies, including certain bank supervisory authorities, continue to investigate alleged irregularities in the foreclosure practices of
10
ww
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 established this entity. The Bureaus website (http://www.consumerfinance.gov/the-bureau/) notes that its central mission is to make markets for consumer financial products and services work for Americanswhether they are applying for a mortgage, choosing among credit cards, or using any number of other consumer financial products. 11 According to the Reuters article, the consultants to be hired by the banks affected by the OCC Consent Order will look back at foreclosure actions through January 2009, consistent with the Relevant Period herein.
w.
St
op Fo
re
clo
55
su re
2011, acting Comptroller of the Currency John Walsh stated that [a]n independent review of
Fr au d. co
128.
131.
Bank of America thus faces a broad range of current and future expenditures
proximately caused by the misconduct of the Individual Defendants as alleged herein, including the costs incurred and to be incurred from the following: a. Commission; b. Oversight Counsel; c.
foreclosure documentation problems conducted by the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corp., and the Office of Thrift
d.
attorneys general; e.
regarding individual borrowers with respect to the Companys mortgage servicing portfolio and
w.
to prepare detailed findings in a Foreclosure Report; f. costs associated with implementing a plan acceptable to the OCC to
ww
remediate all financial injury to borrowers caused by the errors, misrepresentations, or other
St
op Fo
Supervision and the OCC Consent Order and Federal Reserve Consent Order related thereto; payments related to the multi-billion dollar settlement offer tendered to the
costs associated with the OCC Consent Orders requirement that the
re
clo
56
su re
Fr au d. co
residential mortgage servicers. Authorities have publicly stated that the scope of the investigations extends beyond foreclosure documentation practices to include mortgage loan modification and loss mitigation practices. The Corporation is cooperating with these investigations and is dedicating significant resources to address these issues. The current environment of heightened regulatory scrutiny has the potential to subject the Corporation to inquiries or investigations that could significantly adversely affect its reputation. Such investigations by state and federal authorities, as well as any other governmental or regulatory scrutiny of our foreclosure processes, could result in material fines, penalties, equitable remedies (including requiring default servicing or other process changes), or other enforcement actions, and result in significant legal costs in responding to governmental investigations and additional litigation.
costs associated with compliance with the Federal Reserve Consent Order; defending litigation commenced against the Company by RMBS investors
who generally seek rescission as described in the Companys SEC filings reviewed and approved of by the Director Defendants; i.
by homeowners, particularly the action captioned In re Bank of America Home Affordable Modification Program (HAMP) Contract Litig., MDL No. 2193 (D. Mass.);
robo-signer law firms in Florida namely, The Law Offices Of David J. Stern, P.A.; l. responding to investigations by state attorneys general into the Companys
The Company also has suffered losses, and faces huge future potential liability,
from its failures to follow applicable state laws and regulations governing the documentation of its ownership in the residential real property that provides security for its residential mortgage loans. Such losses and liabilities include, inter alia: a. costs associated with the dismissals and subsequent re-filings of pending
judicial and non-judicial foreclosure actions prompted by such failures and damages from the various qui tam actions filed against the Company; and
properly recorded the Companys ownership interest in real estate. For example, in the qui tam
ww
action styled State of California ex rel. Bates, the damages sought by plaintiffs include the following:
w.
governmental entities as a result of its participation in MERS and not ensuring that MERS
St
b.
op Fo
damages and penalties from its failure to file recording fees with various
re
clo
57
su re
k.
Fr au d. co
deficiencies relative to the Companys deficient default loan management processes identified in
VII.
by virtue of their ability to control the business and corporate affairs of the Company, the Individual Defendants owed and owe Bank of America and its shareholders fiduciary obligations of trust, loyalty, good faith, and due care, and were and are required to use their utmost ability to
Defendants were and are required to act in furtherance of the best interests of Bank of America and its shareholders so as to benefit all shareholders equally and not in furtherance of their personal interest or benefit.
shareholders the fiduciary duty to exercise good faith and diligence in the administration of the
ww
w.
affairs of the Company and in the use and preservation of its property and assets, and the highest
St
134.
Each of the Individual Defendants owed and owes to Bank of America and its
op Fo
control and manage the Company in a fair, just, honest, and equitable manner. The Individual
re
clo
133.
58
su re
Fr au d. co
treble damages for all recording fees which were not paid in full as required by the laws of the State [of California] on any and all such avoided recording fees during the ten (10) years immediately preceding the filing of the original Complaint herein; civil penalties of between $5,000 and $10,000 for each unpaid and/or underpaid recording fee in the ten (10) years immediately preceding the filing of the original Complaint herein; civil penalties of between $5,000 and $10,000 for each false document recorded, including, without limitation, each deed of trust, deed of appointment of substitute trustee, deed of foreclosure sale, and other documents recorded in the ten (10) years immediately preceding the filing of the original Complaint herein, which security instrument purported to secure an obligation by real estate in the State and in which MERS was named as beneficiary and/or nominee of the lender; civil penalties of between $5,000 and $10,000 for each act during the ten (10) years immediately preceding the filing of this Complaint for having knowingly made, used and caused to be made or used, false records and/or statements to conceal, avoid or decrease obligations to pay or transmit money duly owed to the State and/or its Counties for recording fees reflecting the assignments of rights or interests in real property in the State.
each of the other Individual Defendants and of the Company, and was at all times acting within the course and scope of such agency. 136.
reasonable and prudent supervision over the management, policies, practices, and controls of Bank of America. By virtue of such duties, they were required to, among other things: a.
conducted in an efficient, business-like manner so as to make it possible to provide the highest quality provision of financial services to its customers; b.
honest, and prudent manner and complied with all applicable federal and state laws, rules, regulations, and requirements, and all contractual obligations, including acting only within the scope of its legal authority; c.
and operations, exercise good faith in taking appropriate action to correct the misconduct and prevent its recurrence; d.
remain informed how the Company conducted its operations, and, upon
receipt of notice or information of imprudent or unsound conditions or practices, make reasonable inquiry in connection therewith. 137. The Individual Defendants who were and are members of the Board committees
responsible for risk oversight assumed additional fiduciary duties in connection with such service.
w.
138.
ww
committee is to assist the Board of Directors of the Company in exercising oversight of (i)
the effectiveness of the Companys system of internal controls and policies and procedures for 59
St
The Audit Committee. During the Relevant Period, the Company had a standing
a.
op Fo
The Audit Committees charter notes that among other things, this
re
clo
su re
exercise good faith to ensure that the Company was operated in a diligent,
Fr au d. co
135.
At all times relevant hereto, each of the Individual Defendants was the agent of
Company, and (iii) the compliance by the Company with legal and regulatory requirements. The members of this committee were charged under its charter to substantively interface with Company management on a variety of financial matters, including annual discussions regarding
the contents of the Companys annual and quarterly consolidated financial statements; any correspondence with regulators or governmental entities which raise significant issues regarding the Companys financial statements or accounting policies, and the Companys quarterly disclosures under Managements Discussion and Analysis of Financial Condition and Results of Operations . b.
closely with members of the Credit Committee and Enterprise Risk Committee. To effectuate the integrity of the Companys financial reporting, the Audit Committee members are to [r]eview, with a representative of the Credit Committee, the methodology used by the Credit Committee of the Company in evaluating the Companys allowance for credit losses annually, or more frequently if such methodology changes. Further, to facilitate the Companys compliance with applicable legal and regulatory requirements, the Audit Committee charter requires that members of this committee,[i]n conjunction with the Enterprise Risk Committee, which has overall responsibility to oversee all material risk of the Company, including operational risk to [o]versee and assess the Companys policies and procedures for managing and evaluating risk through review of reports from Corporate Audit, lines of business, the Independent Registered Public Accounting Firm, and regulators[] and [r]eview the scope and content of examinations of the Company performed by the examination forces of the Federal Reserve Board, Comptroller
including comments as to the suitability of necessary corrective action taken, and to the response
ww
made to the regulators. The charter requires that with regard to these matters, the chair of the Audit Committee shall report its findings to the Board at each regular meeting.
w.
of the Currency and other regulatory agencies; and report their conclusions to the Board,
St
op Fo
re
clo
60
su re
Fr au d. co
managing and assessing risk, (ii) the integrity of the consolidated financial statements of the
SEC Consent Judgment, the Committee shall retain Counsel with expertise in disclosure issues
and discuss in executive session at all scheduled Committee meetings the adequacy of the Companys disclosures in its public Disclosure Statements (as defined in the Companys Disclosure Committee Charter) for a period of three years, ended February 24, 2013. Such counsel was to provide the following services:
139.
The Enterprise Risk Committee. According to its charter, the Enterprise Risk
Committee exercises oversight of senior managements identification of the material risks facing the Company and, except as allocated by the Board of Directors of the Company [] to another committee of the Board, oversight of senior managements management of, and planning for, the Companys material risks, including market risk, interest rate risk, liquidity risk,
managements activities with respect to operational risk (including review of reports from the Audit Committee on the effectiveness of the Companys efforts at monitoring and correcting deficiencies)[.] The Chair of the Enterprise Risk Committee shall report its findings to the Board at each regular meeting. 140.
The Credit Committee. The Credit Committees charter charges its members
with the responsibility for exercising oversight of senior managements identification and management of the Companys credit exposures on an enterprise-wide basis and the Companys responses to trends affecting those exposures, and oversight of senior managements actions to
ww
ensure the adequacy of the allowance for credit losses and the Companys credit-related policies. The charter requires that the chair of this committee report its findings to the Board at each regular meeting. 61
w.
St
op Fo
re
operational risk and reputational risk. Among other things, this committee shall oversee
clo
su re
(i) review drafts of all of BACs public disclosure statements, including all quarterly reports, annual reports, proxy statements, and current reports containing financial information; and (ii) confer, in executive session, with members of the Audit Committee at all regularly scheduled meetings of the Audit Committee, separate and apart from the non-independent members of BACs Board of Directors, to discuss the adequacy of BACs disclosures in its public disclosure statements.
Fr au d. co
c.
owed to the Company and to its shareholders the fiduciary duty of loyalty, good faith, and
diligence in the management and administration of its affairs, as well as in the use and preservation of its property and assets. The conduct of the Individual Defendants complained of herein involves a knowing and culpable violation of their obligations as directors of Bank of America, the absence of good faith on their part, and a knowing or willful disregard for their duties to the Company and its shareholders that the Individual Defendants were aware posed a risk of serious injury to the Company. 142.
The Individual Defendants breached their fiduciary duty of loyalty to act in the
management-related processes, procedures, and controls, despite having knowledge that such processes, procedures, and controls became essential in the wake of the fallout in the mortgage business, and even though they represented to the federal government that such function and related controls were in place. The Company, lacking a sufficiently-staffed default loan
management infrastructure, therefore outsourced the function to third parties which, in many cases, improperly performed that function. Now, the Company faces numerous lawsuits related to alleged improper foreclosures, alleged improper property recording practices, put-back demands, and most recently, the OCC Consent Order and Federal Reserve Consent Order based on findings showing unsafe or unsound banking practices. Thus, Bank of America has
expended, continues to expend, and will expend in the future, significant and material sums of money as a direct result of the breaches of fiduciary duties by the Individual Defendants. VIII. DERIVATIVE ACTION ALLEGATIONS 143. Plaintiff brings this action derivatively on behalf of and for the benefit of Bank of
America to redress injuries suffered, and yet to be suffered, by it as a direct and proximate result
ww
of the breaches of fiduciary duty alleged herein. The Company is named as a nominal defendant solely in a derivative capacity.
w.
St
op Fo
re
clo
62
su re
best interests of the Company by failing to take necessary steps to strengthen its default loan
Fr au d. co
141.
2006 and has held such shares continuously since she purchased them. Thus, Plaintiff was a Bank of America shareholder at the time of the wrongdoing complained of herein. Plaintiff will adequately and fairly represent the interests of the Company and its shareholders in this litigation, and intends to retain her shares of Bank of America throughout the duration of this litigation. 145.
The wrongful acts complained of herein subject, and will persist in subjecting,
Bank of America to continuing harm because the adverse consequences of the injurious actions are still in effect and ongoing. 146.
Bies, Bramble, Colbert, Gifford, Holliday, Jones, Lozano, May, Powell, Rossotti, and Scully. 149. Plaintiff did not make a pre-suit demand on the Board to bring the derivative
claims herein because such a demand would have been a futile and useless act, and therefore, such a demand is legally excused. 150.
Of the current Board members, five (Bramble, Gifford, May, Lozano, and
Rossotti) reviewed and approved of the 2008 10-K filing, which admitted that hundreds of
ww
thousands of homeowners who collectively comprised approximately $100 billion of mortgage loans might require modification assistance from the Company. 63
w.
St
Moynihan) were informed of regulators concerns conveyed by Lewis on December 30, 2008 as
Of the current Board members, six (Bramble, Colbert, Gifford, Lozano, May,
op Fo
re
148.
clo
su re
The wrongful actions complained of herein were unlawfully concealed from the
Fr au d. co
144.
Gifford, Holliday, Jones, Lozano, Powell, Rossotti, and Scully)12 reviewed, approved, and
caused to be filed the Companys 2009 Form 10-K with the SEC, which depicted: (a) a 50% increase in the loss experienced by the Companys Home Loans & Insurance business segment; (b) a 670% increase in representations and warranties expense; (c) a 135% increase in nonperforming residential mortgage loans; (d) a 50% increase in non-performing home equity loans; (e) a 3000% increase in accruing residential mortgage loans past due 90 days or more; and (f) a 350% increase in credit losses related to residential mortgage loans. This filing also noted that the FTC had commenced a legal proceeding against the Countrywide entities acquired by the
Companys Form 10-Q filed in May 2010 disclosed a settlement in which the Company agreed to pay $108 million to the FTC to settle the matter. 153.
Of the current Board members who did not review and approve of the Companys
2008 and/or the 2009 10-K filings, they necessarily were informed of the significant financial, accounting and risk management issues and compliance programs pursuant to the Director Orientation and Continuing Education provision of the Companys Corporate Governance Guidelines. These guidelines provide as follows: Director Orientation and Continuing Education. All new directors must participate in the Companys orientation program for new directors within six months of their election or appointment. This orientation will include presentations by senior management to familiarize new directors with the Companys strategic plans, its significant financial, accounting and risk management issues, compliance programs, conflict policies, Code of Ethics, Insider Trading Policy and other policies. (Emphasis added).
management internal controls as alleged herein involved core business issues with a financial magnitude of many billions of dollars, it is reasonable to infer that such directors became fully
ww
informed of these issues within a short time after joining the Board. As a result, their failure to
12
Five of these directors were deemed financial experts under criteria published by the SEC, and two of them were deemed by the Board to not be independent. 64
w.
St
op Fo
re
clo
su re
Company, alleging that loan servicing practices were deficient. A little over a year later, the
Fr au d. co
152.
properly discharge its default loan management functions evinces a conscious disregard of a known duty. 154.
All of the current Board members (Moynihan, Bies, Bramble, Colbert, Gifford,
Holliday, Jones, Lozano, May, Powell, Rossotti, and Scully) reviewed, approved, and caused to be filed the Companys 2010 Form 10-K with the SEC, which depicted further severe deterioration in the Companys residential mortgage assets. 155.
its residential mortgage loan business as alleged above involved core business issues of the
that year, the Companys Home Loan & Insurance segment comprised a materially significant portion of its business, involving about 11% of its assets and contributing about 12% to its revenues. In October 2008, the federal government made it clear that the lifeline it was about to extend to the Company to bail out its failing home loan mortgage business required direct action by the Boardthe government specifically stated that it expected the Companys former CEO to contact the Board to gain authorization to participate in TARP before the CEO could execute the Major Financial Institution Participation Commitment. See supra 36. As noted above, the Companys 2009 Form 10-K, signed by a majority of the current Board, depicted a shocking deterioration in its residential mortgage loan business involving potential liabilities in the many billions of dollars. By 2010, as illustrated in the Form 10-K for that year signed by a majority of the Director Defendants, the metrics for this business had continued their astounding decline. See supra 55-60. By the third quarter of that year, the OCC had ordered Bank of America,
ww
Americans residential mortgage loan business, the Companys corporate governance policies ensured that this information not only was front and center before certain Board committees, but 65
w.
along with seven other large banks, to conduct a comprehensive self assessment of its
156.
St
op Fo
re
clo
su re
Company that remained front and center before the Board since as early as 2008. By the end of
Fr au d. co
implement adequate internal controls and cause the Company to devote adequate resources to
portions of the charters of the Boards Audit, Enterprise Risk and Credit committees show that a
wide variety of substantive information concerning the Companys dramatically deteriorating residential mortgage business would have been presented to such committees, and that their chairs would have made regular reports to the Board regarding such issues. The members of these committees, along with the Board itself, thus had ample opportunity to have caused the Company to implement adequate internal controls and devote sufficient resources to its default loan management functions. Their abject failure to do so evinces a conscious disregard of a known duty that exposes these defendants to a substantial likelihood of liability.
the deterioration of the residential loan business suffered by the Company, direction from government regulators to take proactive steps to identify problems with its default loan management internal processes, the FTCs investigation regarding deficient loan administration practices, subsequent consent order and the Companys agreement to pay $108 million to the FTC, as well as corporate governance procedures that ensured such information was presented to the Board, and which required new directors to become familiar with these very issues, it is reasonable to infer that by failing to implement adequate internal controls and resources to ensure that the Companys default loan management resources, policies, procedures and controls were sufficient and proper, a majority of the current Board breached the duty of loyalty by acting in willful disregard of a known duty. 158. The current members of the Audit Committee are defendants Bies, Jones, Powell,
Scully and Rossotti, the latter of whom is the Chair. These defendants cannot impartially
Committees charter, each of these defendants was responsible to the Board in exercising
ww
oversight of the (i) effectiveness of the Companys system of internal controls and policies and procedures for managing and assessing risk, (ii) the integrity of the consolidated financial statements of the Company, and (iii) the compliance by the Company with legal and regulatory 66
w.
consider a demand because they face a substantial likelihood of liability. Under the Audit
St
op Fo
re
clo
su re
157.
Given the core business nature of the foregoing matters, the magnitude and rate of
Fr au d. co
was routinely presented to the Board itself during the Relevant Period. The above-referenced
disclosures under Managements Discussion and Analysis of Financial Condition and Results of Operations, They failed, however, to properly discharge such duties, at a minimum, by (a) not timely and sufficiently responding to residential mortgage loan servicer issues brought to their attention by the FTC, the OCC, and the NY Fed until they were forced to do so, and (b) not preventing the recurrence of false and misleading Proxy statement disclosures similar to the type of proxy misstatements condemned by the SEC in relation to the SEC Consent Judgment. Such breaches are particularly egregious in light of the SEC Consent Judgments requirement that the Audit Committee retain independent counsel to assist it with disclosure issues. Indeed, such
adequacy of BACs disclosures in its public disclosure statements. Despite such procedures, the Audit Committee failed to ensure that the Companys Proxy was not false or misleading, and failed to adequately respond to the information in the Companys financial statements that reasonably put this committees members on notice that the Companys internal controls over its default loan management were not adequate or proper. 159. According to the Companys Form DEF 14A filed on March 30, 2011, the Board
has determined that all Audit Committee members are financially literate in accordance with the NYSE listing standards and qualify as audit committee financial experts under SEC rules. The Company made a similar disclosure with regard to all Audit Committee members in its Form DEF 14A filed on March 17, 2010. Given that these members of the Audit Committee were deemed to be experts who were financially literate, they had heightened fiduciary duties in their capacities as members of this committee to properly discharge the duties noted herein.
ww
Colbert, May and Bramble, the latter of whom is the Chair. The members of this committee cannot impartially consider a demand because they face a substantial likelihood of liability. These defendants were charged under the charter of this committee to oversee managements 67
w.
Nevertheless, said defendants breached their duties as alleged herein. 160. The current members of the Enterprise Risk Committee are defendants Bies,
St
op Fo
re
clo
su re
counsel was required to have met with the Audit Committee in executive session to discuss the
Fr au d. co
requirements.
however, willfully ignored the flood of information made available to them concerning the material risks faced by the Company that would have, and had, a foreseeably material impact on the Companys internal processes and resources relative to its default loan management
functions. Specifically, such defendants, in concert with the Audit Committee, consciously failed to timely and sufficiently correct the operational deficiencies flagged by the FTC, the OTC and the NY Federal Reserve Bank until forced to do so by above-noted consent orders. As a result, all of them face a substantial likelihood of liability. 161.
The current members of the Credit Committee are defendants Ambani, Lozano,
impartially consider a demand because they face a substantial likelihood of liability. Under the Credit Committees charter, these defendants were to exercise oversight of Company managements identification and management of credit exposures and the Companys responses to trends affecting such exposures, as well as how the Company was positioned to ensure that it adequately allowed for credit losses from such exposures. They failed to properly discharge their duties under the Credit Committee charter because, among other things, they consciously ignored the information detailed herein that should have put them on notice of a need to improve the Companys internal controls and fortify its resources relative to default loan management. In light of such misconduct, the members of this committee face a substantial likelihood of liability. 162. The Board has made a number of decisions that give rise to a reasonable doubt
that they are entitled to protection under the business judgment rule. Such decisions include, inter alia:
to shareholders that they vote against Proposal 7. This proposal had originated in an earlier
ww
letter to shareholders from the New York City Comptroller. See supra 94, 111. The Proxy stated that the Board recommended against voting for this proposal for a number of reasons, the sum and substance of which were that the Company had adequate internal controls in place for 68
w.
St
a.
op Fo
re
clo
su re
Boardman and Gifford, the latter of whom is the chair. The members of this committee cannot
Fr au d. co
identification of and planning for material risks faced by the Company. These defendants,
at the time the Board made this recommendation, the directors had received ample information showing that such controls and resources were not sufficient. Indeed, only a day before the Company published the Proxy, a majority of the Board had executed the OCC Consent Order, where the OCCs detailed findings supported its conclusion that the Company had engaged in unsafe or unsound banking practices relative to its foreclosure proceedings. By willfully
ignoring such information in making its recommendation to vote against Proposal 7, the Board acted in bad faith and in conscious disregard of its duty to make full and complete disclosure of all material information to shareholders when seeking their action. Indeed, the materiality of
OCC Consent Order and Federal Reserve Consent Order and findings and actions by the states of Utah and Connecticut. As such, there is reason to doubt that the Boards recommendation for shareholders to vote against Proposal 7 was the product of valid business judgment. b. The Boards decision to authorize the Company to issue a false and
misleading Proxy for its annual meeting of shareholders in 2011. The Companys March 30. 2011 Proxy, which was authorized by the Board, failed to mention either the OCC Consent Order or the Federal Reserve Consent Order. At the same time, the Board assured shareholders that the Companys internal controls and processes were adequate and recommended that shareholders vote no on Proposal 7. A majority of the Board executed the OCC Consent Order on March 29, 2011, and a high-level Company official executed the Federal Reserve Consent Order on April 13, 2011. As such, the Board had the ability and ample opportunity to cause the Company to issue a revised Proxy well in advance of the Companys annual meeting of
refused to do so.
w.
shareholders on May 11, 2011 in order to correct its false and misleading nature, but failed and Indeed, the unwillingness of the Board to take prompt action so that
ww
Prior to the Boards recommendation set forth in the Proxy about Proposal 7, the Companys counsel asked the SEC for approval to not include that proposal in the Proxy. The SEC declined to so agree, noting concerns about the Companys foreclosure and loan modification processes. See supra 96, 98. 69
13
St
op Fo
re
clo
su re
such information was confirmed by information disclosed by subsequent events, such as the
Fr au d. co
its default loan management processes. See supra 109.13 As shown by the allegations herein,
2011 shareholder meeting reflects the same type of misconduct condemned in the SEC Consent
Judgment, which arose out of the conscious failure by twelve of the current members of the Board to prevent the publication of materially false and misleading disclosures in the Companys October 2008 proxy statement that sought certain shareholder action with regard to its acquisition of Merrill Lynch. Thus, there is reason to doubt that the Boards authorization to issue a false and misleading Proxy was the product of valid business judgment, and such a pattern of intransigent, willful misconduct indicates that a demand on the Board to seek the relief sought herein would have been a futile and useless act. c.
Reserve Consent Order without agreeing to appropriate penalties or monetary relief for the Company. The factual bases of these orders demonstrate that the Board was unwilling to take curative action relative to the Companys deficient default loan management processes until forced to do so by the government. Further, the Board neither admitted nor denied the factual basis for such orders, and declined to agree to or otherwise pursue pecuniary relief for the wrongdoing on behalf of the Company, or agree that any of the persons responsible for the wrongdoing pay any financial penalties to the government. The Boards unwillingness to seek compensatory redress for the Company raises a reasonable doubt that its decisions to enter into the foregoing consent orders were the products of valid business judgment. 163. Twelve of the current Board members (Holliday, Bies, Bramble, Colbert, Gifford,
Jones, Lozano, May, Moynihan, Powell, Rossotti, and Scully) reviewed, approved, and caused the Company to agree to the SEC Consent Judgment related to materially false and misleading
ww
w.
disclosures in the October 2008 proxy statement seeking shareholder action. 164. All current Board members received the January 6, 2011 communication from
St
op Fo
re
clo
70
su re
The Boards decisions to agree to the OCC Consent Order and Federal
Fr au d. co
shareholders had all material information presented to them in an amended Proxy before the May
engage the SEC in furtherance of the no action decision related to omitting Lius shareholder proposal from the Proxy. 166. Demand. 167.
All current Board members received the March 3, 2011 Servicer Settlement
All current Board members recommended that shareholders reject the stockholder
proposal submitted by Mr. Liu that was included in the Proxy. 168.
All current Board members rejected material provisions of the Servicer Settlement
and inability to address the claims alleged herein seeking pecuniary and other relief to compensate the Company for the wrongdoing alleged herein. Thus, Plaintiff did not make a demand on the current Board before instituting this action because the factual allegations herein create a reasonable doubt that a majority of the Director Defendants could have properly exercised independent and disinterested business judgment in responding to such a demand. 170. If Bank of Americas current and former directors are protected against personal
liability for their acts of mismanagement and breach of fiduciary duty alleged herein by directors and officers liability insurance, they caused the Company to purchase that insurance for their protection with corporate funds, i.e., monies belonging to the stockholders of the Company. But the directors and officers liability insurance policies covering the Individual Defendants in this case contain provisions that eliminate coverage for any action brought directly by Bank of America against these Individual Defendants, known as the insured versus insured exclusion.
Companys officers, there would be no directors and officers insurance protection and thus, this
ww
is a further reason why they will not bring such a suit. On the other hand, if the suit is brought derivatively, as this action is brought, such insurance coverage exists and will provide a basis for the Company to effectuate recovery. If no directors and officers liability insurance exists, then 71
w.
As a result, if these directors were to cause Bank of America to sue themselves or certain of the
St
op Fo
re
clo
su re
Fr au d. co
165.
since they will face a large uninsured liability and lose the ability to recover for the Company from the insurance. 171.
Plaintiff did not make any demand on the shareholders of Bank of America to
institute this action because such a demand would have been a futile and useless act for at least the following reasons: a.
numbers of shareholders; c.
excessive expenses, assuming all shareholders could be individually identified. COUNT I Derivatively on Behalf of Bank of America Against the Individual Defendants For Breach of Fiduciary Duty 172. Plaintiff incorporates by reference and realleges each and every allegation
173.
At all relevant times, the Individual Defendants owed the utmost fiduciary duty of
loyalty to the Company and its shareholders. 174. The Individual Defendants duty of loyalty required that they act in good faith to
175.
agreements with the Federal government required that they ensure the Company had sufficient
ww
resources, processes and controls in place to perform proper residential default loan management.
w.
exposure to nonprime residential loans, the decline in the housing market, and Company
St
protect the best interests of the Company and its shareholders. At all relevant times, the Individual Defendants knew that the Companys
op Fo
re
clo
72
su re
and impossible for plaintiff, who has no way of determining the names, addresses or phone
Fr au d. co
the current directors will not cause the Company to sue the Individual Defendants named herein,
credit-impaired residential mortgage assets and that their asset quality was deteriorating. 177.
At all relevant times, the Individual Defendants failed to timely take necessary
remedial steps to address the Companys deficient default loan management internal controls and resources, failed to compensate the Company for their own misconduct, and failed to pursue remedies against other persons who may be responsible for the wrongdoing alleged herein. 178.
The Individual Defendants failed to disclose in the Proxy, and failed to cause the
Company to issue an amended Proxy, that the Companys subsidiary, Bank of America, N.A., had entered into consent orders with the OCC and Federal Reserve. Nor did said defendants
in the Proxy rendered it materially false and misleading and in violation of section 14(a) of the Exchange Act and SEC Rule 14a-9. 179.
Accordingly, the Individual Defendants breached their duties of loyalty and good
faith to the Company and its shareholders in numerous ways as described above. 180. The Individual Defendants are not entitled to any protections that may otherwise
have been afforded by the business judgment rule. 181. The breaches caused substantial damage to the Company and its shareholders.
COUNT II Derivatively on Behalf of Bank of America Against the Director Defendants For Violations of section 14(a) of the Exchange Act and SEC Rule 14a-9 182. Plaintiff incorporates by reference and realleges each and every allegation
contained above, as though fully set forth herein. 183. During the Relevant Period, the Director Defendants caused Bank of America to
disseminate the false and misleading Proxy specified above, which failed to disclose material
ww
facts regarding the consent orders with the OCC and the Federal Reserve that would have made the statements in the Proxy, in light of the circumstances under which they were made, not misleading. 73
w.
St
op Fo
re
clo
su re
disclose any of the substance of those orders in the Proxy. The failure to make such disclosures
Fr au d. co
176.
At all relevant times, the Individual Defendants knew that the Company had
action disseminated during October 2008, the Director Defendants caused Bank of America to enter into the SEC Consent Judgment, which concerns false or misleading disclosures in a proxy statement that sought shareholder action with regard to the Companys acquisition of Merrill Lynch. 185.
the OCC Consent Order on March 29, 2011, and the remaining Director Defendant was provided with or had unlimited access to copies of the OCC Consent Order well in advance of the May 11, 2011 annual meeting of Bank of America shareholders. As such, the Director Defendants had
misrepresented and/or omitted material facts, including material information concerning the fact that Bank of Americas subsidiary, Bank of America, N.A., had entered into the OCC and Federal Reserve consent orders; that the OCC Consent Order had been executed by specific members of the Board who constituted a majority of the directors; that the OCC had made many adverse findings concerning the Companys defective default loan management internal processes and controls; and that Bank of America agreed in the Consent Order to various improvements in such internal controls, including the formation of a new committee of the Board called the Compliance Committee. 187.
The omission of the OCC Consent Order and Federal Reserve Consent Order
from the Proxy made various statements therein materially false and misleading, including,
ww
OCC Consent Order, the Director Defendants caused the Company to publish untrue statements of material facts and omitted to state material facts necessary to make the statements that were 74
w.
without limitation, the statements and recommendation made in the Proxy concerning the
188.
St
In failing to cause Bank of America to issue an amended Proxy to account for the
op Fo
re
clo
su re
the ability and ample opportunity to cause the Company to issue a revised Proxy in order to
Fr au d. co
184.
Also during the Relevant Period, but in relation to a proxy seeking shareholder
promulgated thereunder. By virtue of their positions within the Company, as well as their
execution and/or personal knowledge of the OCC Consent Order, the Director Defendants were aware of this information and of their duty to disclose this information in the Proxy. 189.
The Director Defendants were at least negligent in filing the Proxy with the
The omissions and false and misleading statements in the Proxy are material in
that a reasonable shareholder would have considered them important in deciding how to vote on the various matters set forth in the Proxy for shareholder action. In addition, a reasonable
By reason of the foregoing, the Director Defendants violated section 14(a) of the
COUNT III Derivatively on Behalf of Bank of America Against the Director Defendants For Violations of Section 20(a) of the Exchange Act 192. Plaintiff incorporates by reference and realleges each and every allegation
193.
the OCC Consent Order on March 29, 2011, and the remaining Director Defendant was provided with or had unlimited access to copies of the OCC Consent Order well in advance of the May 11,
the ability and ample opportunity to cause the Company to issue a revised Proxy in order to
ww
the meaning of section 20(a) of the Exchange Act as alleged herein. By virtue of their positions as members of the Board, participation in and/or awareness of the Companys operations,
w.
prevent the issuance of a false and misleading Proxy. 194. The Director Defendants acted as controlling persons of Bank of America within
St
2011 annual meeting of Bank of America shareholders. As such, the Director Defendants had
op Fo
re
clo
75
su re
shareholder would view a full and accurate disclosure as significantly altering the total mix of
Fr au d. co
made not misleading, all in violation of section 14(a) of the Exchange Act and Rule 14a-9
OCC and Federal Reserve Consent Orders, they had the power to influence and control and did influence and control, directly or indirectly, the decision making by the Company, including the content and dissemination of the materially false and misleading Proxy. 195.
The omission of the OCC Consent Order and Federal Reserve Consent Order
from the Proxy made various statements therein materially false and misleading, including, without limitation, the statements and recommendations made in the Proxy concerning the shareholder proposal submitted by Liu. 196.
By virtue of the foregoing, the Individual Defendants have violated section 20(a)
197.
As set forth above, the Director Defendants had the ability to exercise control
over and did control a person or persons who have each violated section 14(a) and SEC Rule 14a-9, by their acts and omissions as alleged herein. By virtue of their positions as controlling persons, these defendants are liable pursuant to section 20(a) of the Exchange Act. PRAYER FOR RELIEF
A.
Against each Individual Defendant and in favor of Bank of America for the
amount of damages sustained by the Company as a result of the breaches of fiduciary duties by the Individual Defendants; C.
corporate governance and internal procedures to comply with applicable laws and to protect the Company and its shareholders from a repeat of the damaging events described herein, including,
ww
but not limited to, putting forward for shareholder vote, resolutions for amendments to the Companys Bylaws or Articles of Incorporation and taking such other action as may be necessary to place before shareholders for a vote the following corporate governance policies: 76
w.
St
Directing Bank of America to take all necessary actions to reform and improve its
op Fo
re
clo
su re
Fr au d. co
intimate knowledge of the false statements contained in the Proxy and personal knowledge of the
which it intakes, processes and decides upon loan modification requests from homeowners; 3.
6.
and implement procedures for greater shareholder input into the policies and guidelines of the Board relevant to the matters complained of herein; D.
and state statutory provisions sued hereunder. E. Awarding to Bank of America restitution from the Individual Defendants, and
each of them, and ordering disgorgement of all profits, benefits, and other compensation obtained by the Individual Defendants from the Company; F. Awarding Plaintiff the costs and disbursements of this action, including
reasonable allowance of fees and costs for Plaintiffs attorneys, experts and accountants; and
ww
w.
G.
St
Granting Plaintiff such other and further relief as the Court deems just and proper.
op Fo
re
clo
77
su re
Fr au d. co
1.
a proposal to remove from the Board those members who have breached
JURY DEMAND Plaintiff demands a trial by jury on all applicable issues. Dated: June 17, 2011 Respectfully submitted,
/s/ David Pastor_______________ David Pastor (BBO#391000) 63 Atlantic Avenue, 3rd floor Boston, MA 02110 Telephone: 617-742-9700 Facsimile: 617-742-9701 dpastor@gilmanpastor.com EMERSON POYNTER LLP John G. Emerson jemerson@emersonpoynter.com 830 Apollo Lane Houston, TX 77058-2610 Tel: (281) 488-8854 Fax: (281) 488-8867
op Fo
St
ww
w.
re
clo
Scott E. Poynter scott@emersonpoynter.com 500 President Clinton Ave., St. 305 Little Rock, AR 72201 Tel: (501) 907-2555 Fax: (501) 907-2556 JIGARJIAN LAW OFFICE Robert A. Jigarjian jigarjianlaw@gmail.com 128 Tunstead Avenue San Anselmo, CA 94960 Tel: (415) 341-6660 Attorneys for Plaintiff
78
su re
Fr au d. co
ww w. S
to
pF
or
ec lo
su
re Fr
au d
.co
ww
w.
St
op Fo
re
clo
su re
Fr au d. co
ww
w.
St
op Fo
re
clo
su re
Fr au d. co
ww
w.
St
op Fo
re
clo
su re
Fr au d. co