Can You Sue Ken Lewis?
By paul.smalera
Created 02/01/2010 - 3:24pm
"Yes, but he will almost certainly never have to pay you."
One of the last public acts Kenneth Lewis performed before retiring as CEO of Bank of America [2] (BAC) was to forgo [3] his 2009 bonus and salary, thanks to the bank’s poor performance under his leadership. The main cause for Lewis’ docked pay was the questionable takeover of the severely ailing Merrill Lynch, also main reason for his early departure from the executive suite.
Soon after the shareholder vote affirming the deal, Bank of America was accused by two of its largest shareholders, the California teachers and public employees pension funds, of withholding materially adverse information about Merrill Lynch’s books from shareholders, the Federal Reserve, and the Treasury Department, in order to win the necessary approval. These omissions enraged the SEC and institutional shareholders, which have both filed lawsuits on the matter, Indeed, there is a long list of parties who have been aggrieved by BofA, almost a who’s who of losers in the financial crisis: mortgage-backed securities buyers, underwater homeowners, homeowners who have been wrongly foreclosed upon [4], banking customers angry about overdraft fees [5], privacy practices [6], the attorney general of Ohio [7], Hurricane Rita victims [8], and, well, the list goes on. The U.S. Party/Case Index, a database of nearly every federal lawsuit in the country, currently lists more than 5,000 lawsuits in which the Bank of America is a party.
There are also nearly 1,500 lawsuits in which a Kenneth Lewis is named. It’s reasonable to assume that a large majority of the 1,500 suits are indeed against that Ken. Lewis, even in his dotage, will likely be dealing with the legal fallout of his time at the helm for years to come. That’s why one of his last private acts at Bank of America was to set up a special insurance policy, purchased from AIG [9] (AIG) subsidiary Chartis, to protect him from being personally responsible for financial judgments related to his tenure as CEO. (Bank of America declined to comment on the policy, and AIG never returned our call.)
Ken Lewis’ policy, The Big Money has learned, is a special kind of Directors & Officers Insurance, which, over the past 20 years, has become de rigueur for public companies of all stripes to carry. Starting with a change in corporate law in the 1960s, corporate officers were at greater risk of being sued for fraud or errors. It wasn’t until the 1980s S&L scandal that the policies began to be regularly called on. Today more than 90 percent of large multinationals carry some form of D&O, according to insurer Munich Re. It’s become especially indispensible for financial institutions, since a recent study [10] says that securities lawsuits have been increasing. Naturally, the financial crisis fallout has only enhanced. For every government agency like the SEC that says it won’t sue individual directors for their liability [11], there are teams of homeowners and shareholders who are less interested in remuneration than inflicting justice, plain and simple. Or worse, there are jurists like Judge Rakoff [12] who rejected the $33 million settlement, which Bank of America and the SEC agreed upon, as far too low, given the scope of the charges.
Given the tough legal environment, it’s no surprise that banks are protecting their officers with these policies—it’d be pretty hard to convince most top executives to work without one. And with the Supreme Court’s recent ruling that corporations are essentially people, too—company officers would rightfully ask why their employers are insured to the hilt while they are exposed to litigation, especially if the court’s ruling puts more emphasis on suing the individuals behind a corporation’s decisions, rather than the presumably dumb vessel of the corporation itself. But Lewis’ policy is special, and a little different than a standard “D&O.” Essentially, it kicks in only if Bank of America’s regular D&O “tower” (all the many dollars of coverage available from multiple companies under one master policy) is exhausted by claims made against it.
And it only covers Lewis’ “non-indemnifiable losses”—situations where Bank of America, for one reason or another, can’t reimburse him personally for judgments made against him as a company officer. (Like, for example, if Bank of America ceases to exist.) A person familiar with the policy called it “highly unusual. There are usually not hush-hush policies designed to cover the individual,” in the D&O practice. “That kind of stuff usually doesn’t happen.”
The policy that covers Lewis is so unusual that the last similarly structured one the person familiar with Lewis’ policy can recall was also issued to the departed head of a financial institution embroiled in controversy. It’s essentially a “retirement policy,” the person said of the plan. It would take a series of major lawsuit losses to exhaust all of Bank of America’s normal D&O insurance for Lewis’ personal policy to kick in. That’s because Bank of America has both indemnifiable and non-indemnifiable “towers” of insurance that would kick in first in such a case and cover Lewis by virtue of his role as a company officer, rather than as an individual. When Lewis’ policy kicked in, it would likely be what’s called a “Side A” policy, which would cover judgments that he directly had to pay and which Bank of America could not pay for him. In short, the policy appears to be Lewis’ last line of defense against the lawyered-up throngs trying to divvy up what’s left of Bank of America’s treasure among themselves.
That said, Risk & Insurance magazine recently suggested [13] that, even though Lewis’ policy might sound like “too much insurance,” you can never really have enough. Since Bank of America’s regular D&O policies are “Side B,” they reimburse the company for judgments paid out when an individual director is found liable.
So a finding against one individual is a hit against the entire company’s insurance. That means, according to R&I, that “multiple claims filed against a company and its directors and officers at one time present the very real concern that the policy limits could be entirely exhausted without substantially covering the defense costs and liabilities incurred by the directors and officers.” Or, basically, that the insurance policy could run out, leaving Ken Lewis to pay his own legal bills, and any claims won against him as CEO of the bank.
While Lewis clearly hopes the policy, if ever triggered, would be a fire blanket of protection around his estate, so far claims on policies like these haven’t automatically led to payouts—they’ve led to more lawsuits. Siemens recently filed claims of $371.2 million against its policies, which were written by its lead insurer, Allianz. Executives and board members of the German conglomerate were caught issuing bribes and kickbacks to win lucrative contracts for the firm. After a court battle, Allianz got its payout to Siemens reduced [14] to $148.5 million.
Ken Lewis would probably like nothing more than a peaceful retirement from Bank of America. But the simple fact that he and his lawyers decided to take out a policy like this one shows there’s a small (and, Chartis hopes, appropriately priced) risk that Lewis’ twilight years will be anything super.
TAP Tagline:
If You Sue Ken Lewis, He Probably Won't Have To Pay You
Links:
[1] http://www.thebigmoney.com/sites/default/files/100201_TBM_kenLewisARTICLE.jpg
[2] http://www.thebigmoney.com/search/interactivedata/BAC
[3] http://www.nytimes.com/2009/10/16/business/16lewis.html?hp=&adxnnl=1&pagewanted=all&adxnnlx=1264453373-2XZbnHu qOQtvNGV45XfQQ
[4] http://abclocal.go.com/kfsn/story?section=news/bizarre&id=7225158
[5] http://www.mymoneyblog.com/archives/2009/02/bank-of-america-overdraft-fee-class-action-settlement.html
[6] http://www.ucan.org/money_privacy/banking_finance_credit_cards/ucan_wins_lawsuit_against_bank_of_america_concerning_poor_privacy_practices
[7] http://wallstreetpit.com/10739-ohio-attorney-general-files-lawsuit-against-bank-of-america
[8] http://www.setexasrecord.com/news/224304-local-woman-says-bank-reneged-on-disaster-relief-agreement
[9] http://www.thebigmoney.com/search/interactivedata/AIG
[10] http://www.dandodiary.com/2010/01/articles/securities-litigation/advisen-releases-yearend-study-of-securities-lawsuits/
[11] http://online.wsj.com/article/SB10001424052748704055104574652601305959222.html?mod=WSJ_hps_LEFTWhatsNews
[12] http://www.nytimes.com/2010/01/12/business/12bank.html?ref=todayspaper
[13] http://www.entrepreneur.com/tradejournals/article/198471555.html
[14] http://www.businessinsurance.com/article/20091208/NEWS/912089990
[15] http://www.thebigmoney.com/users/paulsmalera
No comments:
Post a Comment