Investors not blindsided by AIG’s $10 billion subprime suit, BofA says

American International Group’s $10 billion lawsuit over subprime-mortgage-backed securities it bought from Bank of America was not the cause of the bank’s 2011 stock price drop, BofA has told a federal judge in Manhattan in support of its bid to dismiss a securities fraud suit.

In a reply brief filed in the U.S. District Court for the Southern District of New York, BofA and its officers and directors say they did not hide the pending suit from the investment community and that the stock price dropped for other reasons.

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The AIG suit alleges BofA executives violated federal securities laws by hiding "the largest individual investor claim of its kind against any financial institution in the U.S."

The AIG suit alleges BofA executives violated federal securities laws by hiding "the largest individual investor claim of its kind against any financial institution in the U.S."

Plaintiffs’ consolidated suit says top BofA executives deceived investors, propped up the troubled bank’s stock price with misrepresentations and violated federal securities laws by hiding “the largest individual investor claim of its kind against any financial institution in the U.S.”

In 2011 BofA’s financial reports revealed a barrage of shareholder and regulatory actions related to the collapse of high-risk mortgage-backed securities and the financial industry meltdown from 2008 to 2010, the plaintiffs’ suit said.

Those disclosures included suits against BofA and the two financial institutions that it rescued as part of the federal government’s bank bailout, Countrywide Financial Corp. and Merrill Lynch & Co., the plaintiffs said in opposition to BofA’s motion to dismiss their suit.

(Click here to read the Bank of America’s motion to dismiss on Westlaw.)

Looming suit

But BofA’s financial reports for the first three quarters of 2011 intentionally left out “this looming lawsuit” by insurance giant AIG which “shocked investors, pounding BofA’s shares when the truth was finally revealed,” according to the plaintiffs’ briefing.

The revelation in August 2011 that AIG had filed a $10 billion, 187-page complaint against BofA and its rescued banks over $28 billion in subprime mortgages they allegedly sold it “hammered” BofA’s share price, which closed down 20.3 percent the next day, the plaintiffs’ brief says.

The shareholder plaintiffs allege that BofA executives had known about AIG’s pending suit since January 2011 but hid it in order to inflate the company’s stock price.

In its reply brief in support of the motion to dismiss, BofA says the defendants “could not have had a duty to disclose that AIG was considering suit or the size of the suit … because both of these facts were part of the mix of publicly available information.”

How ‘imminent’?

Moreover, BofA did not, as plaintiffs allege, have a duty to warn that the AIG suit was “imminent” because even the complaint does not claim the bank knew or could have known about it, according to the brief.

Finally, the plaintiffs’ own complaint admits that BofA and AIG had been in talks to settle AIG’s claims, so there was no reason to believe the suit was imminent, BofA says.

The bank adds that there was no reason for it to try to hide the potential suit because it would lose money the same as the other shareholders if the stock price tanked.  Therefore, there is no evidence of scienter, i.e., that the defendants intended to deceive investors, BofA says.

The plaintiffs have also failed to show “causation,” i.e., that the news of the suit caused the severe stock drop in August 2011 that hurt investors, BofA says in the reply brief.

“As defendants showed, the decline in … [BofA's] stock price Aug. 8, 2011, coincided with the first trading day after S&P’s unprecedented downgrade of the U.S. government [credit rating] — a day on which each and every stock in the S&P 500 declined,” BofA says.

In re Bank of America AIG Disclosure Securities Litigation, No. 11-6678, reply brief filed (S.D.N.Y. Feb. 19, 2013).