Bank of America execs, including former CEO Ken Lewis, are gearing up for a heated legal battle with New York Attorney General Andrew Cuomo. On Feb. 4, Cuomo charged Lewis of defrauding investors and the U.S. government when he helped put the wheels into motion for Bank of America to buy financially troubled Merrill Lynch & Co.

Specifically, Cuomo alleges that Lewis, as well as BofA’s former chief financial officer Joe Price, failed to tell shareholders about the $16 billion in losses that Merrill had incurred before it was bought by Bank of America. After shareholders approved the acquisition, Cuomo says Lewis then demanded government bailout funds to keep the deal afloat.

In total, the government injected $45 billion into Bank of America via the purchase of preferred shares, including $20 billion approved after the merger in January 2009.

“We believe the bank management understated the Merrill Lynch losses to shareholders, then they overstated their ability to terminate their agreement to secure $20 billion of TARP money, and that is just a fraud,” Cuomo said today at a press conference. “Bank of America and its officials defrauded the government and the taxpayers at a very difficult time.”

Separately, the Securities and Exchange Commission (SEC) announced that it had reached an agreement with Bank of America over the company’s decision to pay $3.6 billion of bonuses to former Merrill employees for fiscal year 2008. BofA agreed to pay a $150 million fine to settle the matter.

Inland American Real Estate Trust is among several unlisted real estate investment trusts (REITs) to face a wave of backlash from investors lately. Why? Because many independent broker/dealers and their financial advisers misrepresented the risks and characteristics of unlisted REITs like the Inland American Real Estate Trust. Only now are many retail investors coming to terms with the collateral damage that has taken place in their portfolios.

To be sure, sales of unlisted (also known as non-traded) REITs are booming. Unlisted REITs raised more than $10 billion in 2008.

Sold through broker/dealers, shares in unlisted REITs do not trade on national stock exchanges. Redemptions are limited and usually include a minimum holding period. If an investor does decide to get out of the trust entirely, he or she can usually only do so on a specified date.

There are several other caveats associated with unlisted REITs, not the least of which is an exorbitant fee of up to 15% to get in. And that’s in addition to ongoing management fees and other expenses. Even more important: Unlisted REITs often offer no independent source of performance data. They also fail to offer investors a guarantee that their dividend payments will continue throughout their planned investment period in the REIT. 

Non-Traded REITs: Considerations for Hotel Investors by John B. Corgel and Scott Gibson provides an in-depth look at unlisted REITs and the unintended consequences that the products may create for individual investors who do not conduct their own due diligence.

Specifically, the study - which claims to be the first professional and academic report to analyze the structure of non-traded REITs - shows that investors who purchased hospitality REITs early in the investment cycle saw a diminished return as a result of subsequent sales. In other words, the early investors subsidize the commissions paid to the dealers who sell to late-term investors, the report says. 

One of the criticisms cited in the report - and one which has been touted in general by critics of unlisted REITs - is the vague prospectus language regarding exit strategies.

The fixed share prices of non-traded REITs are another bone of contention with naysayers of the products. Often marketed to investors as a selling point, the fixed share price can actually become an unwanted feature. Says Non-Traded REITs: Considerations for Hotel Investors: 

“ . . . this policy of maintaining fixed share prices in companies that continually offer shares at the same or similar fixed prices throughout the investment cycle will have adverse consequences to investors who buy into programs early in the cycle.” 

To their detriment, investors throughout the country may have purchased shares in non-traded REITs like the Inland American Real Estate Trust based on misrepresentations by their brokerage firm. That advice has now proven to financially disastrous. Instead of access to their cash, investors are finding themselves left out in the cold - their money locked up for an undetermined period of time in these illiquid, high-commission products. 

Maddox Hargett & Caruso continues to investigate the selling practices of brokerage firms such as UBS, Merrill Lynch, Citigroup, LPL Linsco, Morgan Keegan & Company, as well as others that may have recommended unsuitable investments in non-traded REITs to their clients. If you have a story to tell about your investment losses in non-traded REITs, contact us. 

A federal judge is saying “no” to the $33 million settlement between Bank of America (BofA) and the Securities and Exchange Commission (SEC), refusing to sign off on the agreement and demanding answers as to why the regulator accepted what he calls a “small penalty.” Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York made his remarks at an Aug. 10 hearing, where he also asked Bank of America for the names of the executives allegedly involved in lying to investors about plans to pay billions of dollars in bonuses at Merrill Lynch, which BofA acquired during the height of the financial crisis.

“If Bank of America misled the shareholders, as you assert about a multibillion dollar matter, isn’t there something strangely askew in a fine of $33 million?” Rakoff asked the SEC’s lawyers during the Aug. 10 hearing. “It is very difficult for me to see how the proposed settlement is remotely reasonable.”

Without Judge Rakoff’s consent, the BofA/SEC settlement cannot move forward. As it stands, the judge has asked for further filings and information by Aug. 24, and says a settlement wouldn’t be approved before Sept. 9. 

On Aug. 3, Bank of America, without admitting or denying the SEC’s allegations, agreed to pay $33 million to settle charges that it misled investors about Merrill Lynch’s plans to pay executive bonuses as it prepared to report fourth-quarter losses totaling more than $15 billion. In turn, those losses affected the fiscal health of Bank of America, which acquired Merrill Lynch in January 2009.

The SEC alleges that Bank of America promised shareholders that Merrill Lynch would not pay year-end bonuses and incentives without first getting BofA’s consent. In reality, however, the SEC says the bank already had given that approval, authorizing Merrill Lynch to pay nearly $6 billion in extra compensation. 

As reported Aug. 10 by the Washington Post, Judge Rakoff had harsh words for BofA lawyers during the hearing, demanding to know the names of the individual or individuals who decided what to reveal to shareholders in a November proxy statement. According to the article, the judge specifically asked whether Bank of America chief executive Kenneth D. Lewis and former Merrill Lynch chief executive John Thain were involved.

“Was it some sort of ghost?” Rakoff asked. “Who were the people? . . . If you are correct that this proxy statement was materially misleading, then at a minimum Mr. Thain and Mr. Lewis would seem to be responsible for that, yes?”

The Securities and Exchange Commission (SEC) has charged Bank of America (BofA) of lying to investors and misleading them about billions of dollars in bonuses being paid to Merrill Lynch executives at the time of its acquisition of the firm. Bank of America, which bought Merrill earlier this year, agreed to settle the SEC’s charges and pay a penalty of $33 million.

According to the SEC’s complaint, Bank of America was in violation of securities laws when it allegedly told shareholders in November 2008 that year-end bonuses would not be paid without its consent.

“In fact, Bank of America had already contractually authorized Merrill to pay up to $5.8 billion in discretionary bonuses to Merrill executives for 2008,” the SEC said in a statement. “The disclosures in the proxy statement were rendered materially false and misleading by the existence of the prior undisclosed agreement allowing Merrill to pay billions of dollars in bonuses for 2008.”

As reported Aug. 3 by the Washington Post, New York Attorney General Andrew Cuomo and Bank of America have been at odds with each over the bonus payments. In February, Cuomo subpoenaed the bank to obtain the names of all bonus recipients, contending that Merrill Lynch accelerated the payments before the announcement of a $9.8 billion fourth-quarter loss.