Opinion

In Re Bank of America Corp. Securities, Derivative, & Employee Retirement Income Security Act (ERISA) Litigation

757 F. Supp. 2d 260
2010 WL 3448194

Court: District Court, S.D. New York
Filed: Aug 27, 2010
Status: Published
Author: Castel
On the bench: P. Kevin Castel
Cited by: 193 cases
Authority: More cited than 99.4%

finding negligence standard satisfied where directors “were aware of the bonus agreement” at issue, “and a review of the Joint Proxy would have shown them that the agreement was not disclosed”

How later courts described this case

finding negligence standard satisfied where directors “were aware of the bonus agreement” at issue, “and a review of the Joint Proxy would have shown them that the agreement was not disclosed”
applying Rule 8(a) pleading standard to Section 14(a) claims sounding in negligence
distinguishing “opinion-based statements that are anchored in ‘misrepresentation of existing facts’” from puffery in the context of securities fraud
“Even ‘indefinite and unverifiable’ terms, such as observations that an offer was' ‘fair’ or of a ‘high’ value, can be actionable under Section 14(a

Written by the judges who cited it.

The opinion

*269

MEMORANDUM AND ORDER

P. KEVIN CASTEL, District Judge:

Plaintiffs allege that, at the peak of the 2008 financial crisis, Bank of America Corporation (“BofA”) hastily agreed to the acquisition of Merrill Lynch & Co., Inc. (“Merrill”), just as Merrill was careening toward insolvency. Plaintiffs assert that in the days and months that followed, the defendants concealed and misstated critical aspects of the transaction, specifically matters related to bonuses, staggering losses accrued in the fourth quarter of 2008, and pressure to consummate the acquisition from officials at the Federal Reserve and the Treasury Department.

This Memorandum and Order addresses six motions to dismiss directed to two different complaints. In the shareholders’ direct action (the “Securities Action”), a consolidated amended class action complaint asserts that defendants violated federal securities laws, and alleges claims on behalf of all persons who purchased or acquired BofA shares between September 15, 2008 and January 21, 2009 (the “Securities Complaint,” or “Sec. Compl.”). Plaintiffs in the derivative action (the “Derivative Plaintiffs” and the “Derivative Action”) assert, on behalf of nominal defendant BofA, claims under both the federal securities laws and state law. In addition to their derivative claims, the Derivative

*270

Plaintiffs also assert a direct claim for breach of fiduciary duty.

All Securities Defendants move to dismiss the Securities Complaint pursuant to Rules 9(b) and 12(b)(6), Fed.R.Civ.P., and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4 (the “PSLRA”). The BofA directors and the BofA officers named in the Derivative Complaint (together, the “BofA Derivative Defendants”) have moved to dismiss most of the claims pursuant to Rules 9(b), 12(b)(6) and 23.1. BofA, as nominal defendant, also has filed a motion to dismiss, and joins in the arguments of the BofA Derivative Defendants. The financial ad-visors retained by BofA in connection with the transaction (the “Financial Advisors”) separately move to dismiss the four derivative claims asserted against them.

While there are distinctions between the Securities Complaint and the Derivative Complaint, they share the same core allegations. They also share certain theories of liability under Section 14(a) and Rule 14a-9. In discussing the two complaints’ assertions under Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78a,

et seq.,

(the “'34 Act”) and Rule 14a-9, the allegations of each are separately analyzed. Elsewhere, when the complaints set forth different factual assertions and theories of liability, they are specifically denoted. No allegation in either complaint is imputed to the other.

For the reasons explained below, the motions to dismiss the Securities Complaint are granted in part and denied in part. The BofA Derivative Defendants’ and BofA’s motions to dismiss the Derivative Complaint are granted in part and denied in part. The Financial Advisors’ motion to dismiss is granted in its entirety.

BACKGROUND................................................................274

I. FACTUAL HISTORY................................................274

A. Parties to the Securities Action....................................274

B. Parties to the Derivative Action....................................275

C. Negotiations Leading up to BofA’s Acquisition of Merrill..............276

D. Negotiations over Merrill’s Bonus Pool.............................276

E. Fairness Opinion and the BofA Board’s Recommendation of the Merger.......................................................277

F. BofA Announces Secondary Offering...............................278

G. BofA and Merrill Incur Significant Losses in the Fourth Quarter of 2008 .......................................................278

H. Joint Proxy Did Not Disclose Merrill’s Growing Fourth Quarter Losses or the Bonus Arrangement...............................279

I. Consideration of the Invocation of the MAC Clause and the Offer of Federal Capital Support......................................281

J. BofA Announces Fourth Quarter Results and Federal Financial Support......................................................283

K. Claims Asserted in the Securities Complaint.........................284

L. Claims Asserted in the Derivative Complaint........................284

II. PROCEDURAL HISTORY...........................................284

DISCUSSION..................................................................285

I. RULE 12(b)(6), RULE 9(b) AND THE PSLRA’S PLEADING THRESHOLD.....................................................285

II. THAIN AND MERRILL’S MOTIONS TO DISMISS COUNT II OF THE SECURITIES COMPLAINT ARE GRANTED IN PART AND DENIED IN PART...........................................286

*271

A. Thain and Merrill Had No Disclosure Duty to BofA Shareholders.....287

B. Thain and Merrill’s Motions to Dismiss the Section 14(a) and Rule 14a-9 Claims Are Denied.......................................288

III. DEFENDANTS’ MOTIONS TO DISMISS PLAINTIFFS’ '34 ACT CLAIMS FOR FAILURE TO ALLEGE ACTIONABLE MISSTATEMENTS OR OMISSIONS ARE GRANTED IN PART AND DENIED IN PART...........................................289

A. Background on Section 10(b) and Rule 10b-5........................289

B. Background on Section 14(a) and Rule 14a-9........................289

C. Potential for Overlapping Damages Between the Direct and Derivative Section 14(a) Actions .................................291

D. Derivative Plaintiffs Fail to Allege That the Individual BofA Officers Are Liable Under Section 14(a) of the '34 Act..............293

E. Motions to Dismiss for Failure to Allege Actionable Misstatements and Omissions Are Granted, in Part and Denied in Part.......................................................295

1. Securities Complaint Adequately Alleges Material Misstatements Related to Merrill’s Bonus Pool.................295

a. Qualifying Language in the Joint Proxy and Merger Agreement Did Not Disclose BofA’s Consent to the Merrill Bonuses........................................295

b. Press Reports and Past Merrill SEC Filings Did Not Render the Joint Proxy Immaterial or Establish Truth on the Market as a Matter of Law at the Rule 12(b)(6) Stage.................................................300

2. For Substantially the Same Reasons, the Derivative Complaint Adequately States a Claim under Section 14(a) and Rule 14a-9.....................................................302

3. Securities Complaint Adequately Alleges the Materiality of Defendants’ Omissions Concerning Fourth Quarter 2008 Losses....................................................303

4. For Substantially the Same Reasons, the Derivative Complaint Adequately Alleges That Section 14(a) and Rule 14a-9 Required the Disclosure of Merrill’s Fourth Quarter Losses.....307

5. Claims in the Securities and Derivative Complaints Directed to the Merger Agreement’s MAC Clause Are Dismissed...........307

a. Securities Complaint Fails to Plausibly Allege That the Defendants Violated Section 10(b) and Rule 10b-5 by Failing to Disclose Developments Related to the MAC.....307

b. For Substantially the Same Reasons, the Derivative Plaintiffs’ Section 14(a) Claims Arising from the Terms of the MAC Are Dismissed..............................308

c. Derivative Plaintiffs’ Allegations Concerning NonDisclosure of the Decision to Invoke the MAC Clause Fail to State a Claim under Section 14(a) or Rule 14a-9.....309

6. Claims Directed to the Adequacy of BofA’s Due Diligence Are Dismissed.................................................309

a. The Securities Complaint Fails to Plausibly Allege That the Defendants’ Representations Concerning Due Diligence Violated Section 10(b) and Rule 10b-5............309

b. Similarly, the Derivative Plaintiffs Have Not Adequately Alleged That Statements in the Joint Proxy Regarding Due Diligence Violated Section 14(a) and Rule 14a-9.....312

7. Securities Complaint and the Derivative Complaint Both Fail to Plausibly Allege That Defendants Ran Afoul of the '34 Act’s Duty to Update.......................................313

*272

a. Defendants in the Securities Complaint Had No General Duty to Update Certain Statements in Light of the October and November Losses...........................313

b. Derivative Plaintiffs’ Section 14(a) and Rule 14a-9 Claims Based on Statements Regarding the Future Capital Position of BofA and Merrill Are Dismissed................314

8. Motions to Dismiss the Securities Plaintiffs’ Additional Section 10(b) and Rule 10b-5 Claims Are Granted in Part and Denied in Part.............................................314

a. Statements in BofA’s Press Release of January 1,2009 Are Non-Actionable....................................314

b. Motion to Dismiss the Section 10(b) and Rule 10b-5 Claims Is Denied As to BofA’s Allegedly Undisclosed Arrangement to Receive Federal Funds...................314

c. Lewis’s September 15 Remarks About Merrill’s Liquidity Are Non-Actionable....................................316

d. Statements by Lewis Regarding Regulator Pressure and Thain’s Self-Interest Are Non-Actionable.................316

9. Derivative Plaintiffs’ Remaining Section 14(a) Claims Against the BofA Directors Are Dismissed............................317

a. Derivative Plaintiffs Have Not Adequately Alleged That the Joint Proxy Contained Misstatements or Omissions Regarding the Overvaluation of Merrill Assets and Undervaluation of Merrill Losses.........................317

b. Derivative Plaintiffs Have Not Adequately Alleged That Statements about Steps Taken to Improve Merrill’s Financial Condition Were Misleading.....................318

c. Derivative Plaintiffs Have Not Adequately Alleged That Statements Regarding Additional Government Funds to Close the Merger and the Government Guarantee Were Misleading............................................318

d. Derivative Plaintiffs Have Not Alleged That the BofA Directors’ Recommendation Regarding the Merger Was Subjectively False......................................319

IV. THE MOTIONS TO DISMISS THE SECTIONS 10(b) AND 14(a) CLAIMS FOR FAILURE TO ADEQUATELY PLEAD NEGLIGENCE AND SCIENTER ARE GRANTED IN PART AND DENIED IN PART...........................................320

A. Securities Plaintiffs Must Adequately Allege Scienter for Their Section 10(b) Claims and Negligence for Their Section 14(a) Claims .......................................................320

B. Derivative Plaintiffs Also Must Adequately Allege Negligence for Their Section 14(a) Claims......................................322

C. Securities Complaint Pleads Scienter for the Merrill Bonus Arrangement As to Lewis, Thain, BofA and Merrill, and Negligence As to the BofA Directors.............................322

D. Derivative Complaint Adequately Pleads Negligence on the Part of the BofA Directors Regarding the Merrill Bonuses.................324

E. Securities Complaint Fails to Allege Scienter As to Merrill’s Fourth-Quarter Losses, but Both the Securities Complaint and the Derivative Complaint Adequately Allege Negligence............325

1. Securities Complaint Does Not Satisfy the PSLRA and Rule 9(b) in Its Scienter Allegations Regarding the Fourth Quarter Losses............................................325

2. Securities Complaint Adequately Alleges Negligence As to the Losses, and Its Section 14(a) and Rule 14a-9 Claims Survive.....326

3. Derivative Complaint Adequately Alleges Negligence As to Merrill’s Fourth Quarter Losses .............................326

*273

F. Securities Complaint Does Not Allege Scienter for the Failure to Disclose Federal Financial Support for the Transaction.............327

V.DERIVATIVE PLAINTIFFS HAVE ADEQUATELY ALLEGED LOSS CAUSATION FOR THEIR SECTION 14(a) CLAIMS AGAINST THE BOFA DIRECTORS AND DEMAND IS EXCUSED FOR THOSE CLAIMS..................................328

A. Derivative Plaintiffs Have Adequately Alleged Loss Causation for Their Section 14(a) Claims Against the BofA Directors..............328

B. Demand Is Excused for the Derivative Plaintiffs’ Section 14(a) Claims Against the BofA Directors...............................329

VI.DERIVATIVE COMPLAINT FAILS TO STATE A SECTION 14(a) CLAIM AGAINST THE FINANCIAL ADVISORS....................331

VII.SECURITIES DEFENDANTS’ MOTION TO DISMISS THE SECTION 20(a) CLAIM IS DENIED................................331

VIII.SECURITIES DEFENDANTS’ MOTION TO DISMISS THE SECURITIES PLAINTIFFS’ '33 ACT CLAIMS IS GRANTED IN PART AND DENIED IN PART.....................................332

IX.MOTIONS TO DISMISS THE DERIVATIVE PLAINTIFFS’ STATE LAW CLAIMS ARE GRANTED IN PART AND DENIED IN PART............................................................334

A Derivative Plaintiffs Have Abandoned Their Aiding and Abetting a Breach of Fiduciary Duty Claim.................................334

B. Motion to Dismiss the Derivative Breach of Fiduciary Duty Claims Against the BofA Officers and Directors Is Granted................334

1. Demand Is Not Excused for the Breach of Fiduciary Duty Claims Arising from the Merger Approval Because the Derivative Plaintiffs Have Failed to Raise a Reasonable Doubt That the Board Acted Disloyally or in Bad Faith When It Approved the Merger...............................334

a. BofA Directors Were Disinterested and Independent When They Approved the Merger........................334

b. Derivative Complaint Fails to Plead That the BofA Directors Acted Disloyally or in Bad Faith When They Approved the Merger..............................336

2. Alternatively, Plaintiffs Have Failed to State a Claim Against the BofA Derivative Defendants for Breach of Fiduciary Duty Arising from the Time Prior to and Including the Board’s Approval of the Merger..............................337

3. BofA Officers’ Motion to Dismiss the Claims Based on Post-Approval Breaches of Fiduciary Duty is Granted..........339

a. Derivative Plaintiffs Have Not Adequately Alleged That the BofA Officers Breached the Duty of Disclosure.....339

b. Alleged Decision to Retract the Invocation of the MAC Clause................................................340

C. Derivative Plaintiffs Have Failed to State a Claim for Unjust Enrichment...................................................341

D. Derivative Plaintiffs Have Failed to State a Claim for Contribution.....342

E. Demand Is Not Excused for the Derivative Plaintiffs’ Breach of Fiduciary Duty and Professional Negligence Claims Against the Financial Advisors.............................................343

F. Derivative Plaintiffs Fail to State a Direct Claim Against the BofA Directors and Officers for Breach of Fiduciary Duty................344

G. This Action Will Not Be Stayed or Dismissed in Favor of the Delaware Action...............................................345

*274

H. Derivative Plaintiffs May File a Motion Requesting Leave to Amend.......................................................346

X. LETTERS OF FEBRUARY 2010 PLAY NO PART IN THE CONSIDERATION OF THESE MOTIONS ..........................346

CONCLUSION.......................... .....................................346

BACKGROUND

FACTUAL HISTORY

For the purposes of the defendants’ motions, all nonconclusory factual allegations are accepted as true.

S. Cherry St. LLC v. Hennessee Group LLC,

573 F.3d 98, 100 (2d Cir.2009);

see also Ashcroft v. Iqbal,

-U.S.-, 129 S.Ct. 1937, 1949-50 , 173 L.Ed.2d 868 (2009). As the non-movants, all reasonable inferences are drawn in favor of the plaintiffs.

United States v. City of New York,

359 F.3d 83, 91 (2d Cir.2004).

Parties to the Securities Action.

BofA is a Delaware corporation with its headquarters in North Carolina. (Sec. Compl. ¶ 33.) It provides banking and non-banking financial services in the United States and internationally. (Sec. Compl. ¶ 33.) Its shares are traded on the New York Stock Exchange (“NYSE”). (Sec. Compl. ¶ 33.) As of April 30, 2009, it had more than 6.4 billion shares of common stock outstanding. (Sec. Compl. ¶ 33.) Merrill is a financial services company incorporated in Delaware with its headquarters in New York. (Sec. Compl. ¶ 34.) It provides investment banking, research and wealth management services. (Sec. Compl. ¶ 34.) From the start of the class period through its acquisition by BofA on December 31, 2008, Merrill’s shares traded on the NYSE. (Sec. Compl. ¶ 34.)

On January 1, 2009, BofA closed the acquisition of Merrill, which then became a direct subsidiary of BofA. (Sec. Compl. If 34.) The acquisition was structured as a stock-for-stock transaction in which Merrill shareholders swapped each Merrill share in exchange for 0.8595 of a share of BofA’s common stock. (Joint Proxy Cover Letter.) In order to consummate the transaction, BofA issued approximately 1.71 billion shares of common stock and 359,100 shares of preferred stock. (Joint Proxy Cover Letter.) BofA needed shareholder approval in order to issue the shares, which required, among other things, amendment to its certificate of incorporation. (Joint Proxy, Notice of Special Meeting.) BofA and Merrill often describe the transaction as a “merger,” although it was not a merger in the true sense, and was instead a stock-for-stock acquisition of Merrill by BofA. Because the transactional documents and disclosures characterize the acquisition as a “merger,” the Court will occasionally employ the parties’ preferred terminology.

Defendant Kenneth Lewis was BofA’s CEO, president, and chairman of the board of directors during the class period. (Sec. Compl. ¶ 35.) Lewis signed the Agreement and Plan of Merger (the “Merger Agreement”) governing the acquisition. (Sec. Compl. ¶ 35.) Lewis also signed the transmittal letter for BofA and Merrill’s definitive joint proxy statement (the “Joint Proxy”), which was dated October 31, 2008 and filed with the SEC on November 3,2008. (Sec. Compl. ¶ 35.)

Defendant Joe L. Price was BofA’s CFO. (Sec. Compl. ¶ 36.) Defendant Neil A. Cotty was BofA’s Chief Accounting Officer prior to the announcement of the acquisition; after the acquisition’s announcement, he was appointed Merrill’s interim CFO and functioned as a liaison between

*275

BofA and Merrill. (Sec. Compl. ¶ 37.) Defendant John A. Thain was CEO and chairman of the board of Merrill from the beginning of the class period through December 31, 2008. (Sec. Compl. ¶ 38.) From January 1, 2009 through the end of the class period, Thain was president of global banking, securities and wealth management at BofA. (Sec. Compl. ¶ 38.)

In addition to their claims against senior management of the two companies, the Securities Plaintiffs also bring claims against fifteen members of BofA’s board of directors.

(Sec. Compl. ¶¶ 39-53.) They assert claims under the Securities Act of 1933, 15 U.S.C. § 77a,

et seq.

(the “'33 Act”) against the underwriters of a secondary offering of BofA shares in October 2008. (Sec. Compl. ¶¶ 362-395.) Those two underwriter defendants are Banc of America Securities LLC (“Banc of America”), which is a wholly-owned subsidiary of BofA, and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPFS”). (Sec. Compl. ¶¶ 56-58.)

The lead plaintiffs are public pension funds that owned shares of BofA common stock dining the class period. (Sec. Compl. ¶¶ 27-31.) Two of the lead plain-, tiffs, the State Teachers Retirement System of Ohio and the Ohio Public Employees Retirement System, purchased shares of BofA common stock as part of the company’s secondary offering in October 2008, which forms the basis of the Complaint’s '33 Act claims. (Sec. Compl. ¶¶ 27-28.)

Parties to the Derivative Action.

The Derivative Plaintiffs assert claims against all sixteen individuals who were BofA directors at the time of the Merrill acquisition, including Lewis (the “BofA Directors”). (Deriv. Compl. ¶¶ 43-58.) Other than defendant Lewis, who was also BofA’s Chairman and CEO during all relevant times, none of the directors were officers or employees of BofA. (Deriv. Compl. ¶¶ 43-58.)

In addition to Lewis, the Derivative Plaintiffs bring claims against a number of BofA officers, including Price, Cotty, BofA Vice Chairman for Corporate Planning and Strategy Gregory Curl, Chief Administrative Officer J. Steele Alphin, Global Risk Executive Amy Woods Brinkley, Brian T. Moynihan, head of Global Banking and Global Wealth and Investment Management and after December 10, 2008, General Counsel, Keith T. Banks, President of BofA’s Global Wealth and Investment Management unit, Timothy Mayopoulos, General Counsel until December 10, 2008, and Associate General Counsel Teresa Brenner (the “BofA Officers”). (Deriv. Compl. ¶¶ 59-67.)

Louisiana Municipal Police Employees Retirement System and Hollywood Police Officers’ Retirement System are the interim lead plaintiffs in the Derivative Action. (MDL Docket #2.) They are citizens of Louisiana and Florida, respectively. (Deriv. Compl. ¶¶ 40-41.) None of the BofA Officers or Directors is a citizen of Louisiana or Florida. (Deriv. Compl. ¶¶ 43-67.)

The Derivative Plaintiffs assert claims against the Financial Advisors, J.C. Flowers & Co. LLC (“J.C. Flowers”) and Fox-Pitt Kelton Cochran Caronia Waller (USA) LLC (“FPK”). Each of the Financial Ad-visors provided the BofA board with an opinion that the consideration BofA paid for Merrill was fair, from a financial point of view, to BofA. (Deriv. Compl. ¶¶ 83-84.)

*276

According to the Derivative Complaint, J.C. Flowers and FPK are limited liability companies “organized and existing under the laws of the State of Delaware,” with their “principal place of business” in New York.

(Id.)

Negotiations Leading wp to BofA’s Acquisition of Merrill.

On the morning of Saturday, September 13, 2008, Thain reached out to Lewis. (Sec. Compl. ¶ 4.) At that time, Thain was CEO of Merrill, and Lewis was CEO of BofA. (Sec. Compl. ¶ 4; Deriv. Compl. ¶ 9.) Thain believed that Lehman Brothers Holdings, Inc. (“Lehman Brothers”) would soon file for bankruptcy, resulting in market turmoil that “would cause severe liquidity issues” for Merrill, beginning as early as the following Monday. (Sec. Compl. ¶ 4; Deriv. Compl. ¶ 98.) Thain believed that a Lehman Brothers bankruptcy would trigger Merrill’s own “catastrophic” collapse and “likely render [Merrill] effectively insolvent” on Monday. (Sec. Compl. ¶ 62; Deriv. Compl. ¶ 98.)

According to the Securities Complaint, Lewis “had long coveted” Merrill, and stated as much in press interviews. (Sec. Compl. ¶¶ 5, 59.) Thain was aware of Lewis’s interest, but previously rebuffed BofA’s offers. (Sec. Compl. ¶ 63.) On Saturday morning, Lewis flew to New York, where he met Thain at 2:30 p.m. (Sec. Compl. ¶ 64; Deriv. Compl. ¶ 100.) Thain proposed selling a 9.9 percent stake of Merrill to BofA. (Sec. Compl. ¶ 64; Deriv. Compl. ¶ 100.) Lewis later recalled, “I responded to John, ‘That’s not really what I have envisioned here. I want to buy the whole company, not invest 9 to 10 percent.’ ” (Sec. Compl. ¶ 64.) The two eventually agreed that any transaction would entail BofA acquiring Merrill in full, and “later that same day, teams from both firms began conducting due diligence and negotiating the terms of a possible merger.” (Deriv. Compl. ¶ 100.)

Negotiations over Merrill’s Bonus Pool.

As talks unfolded over the weekend, bonuses to Merrill employees became a major topic of negotiation. (Sec. Compl. ¶¶ 6, 67; Deriv. Compl. ¶ 101.) According to the Securities Complaint, Thain later stated that, alongside the acquisition price and the language of the Material Adverse Change clause (the “MAC”), the employee bonus arrangement was one of the three principal topics of negotiation. (Sec. Compl. ¶ 67.) The Derivative Complaint asserts that certain BofA officers involved in the negotiations later testified that “Merrill’s ability to pay year-end bonuses to its executives and employees pursuant to its” incentive compensation program was a major topic of negotiation. (Deriv. Compl. ¶ 101.)

The Securities Plaintiffs allege that Thain remained informed of the negotiations’ progress through Greg Fleming, Merrill’s president and chief operating officer. (Sec. Compl. ¶ 67.) Merrill wanted to pay its officers and employees $5.8 billion in bonuses. (Sec. Compl. ¶ 68; Deriv. Compl. ¶ 10.) This included bonuses for executive officers that ranged from $15 million to $40 million. (Sec. Compl. ¶ 68.) The Securities Complaint states that the $5.8 billion bonus pool totaled 12 percent of the transaction’s value and 26 percent more than BofA’s earnings in the first two quarters of 2008. (Sec. Compl. ¶ 72.) “It also represented 77% of Merrill’s record earnings of $7.5 billion for all of 2006; nearly 30% of Merrill’s total stockholders’ equity as of December 26, 2008; and over 8% of Merrill’s total cash as of December 26, 2008.” (Sec. Compl. ¶ 72.)

Merrill wanted to pay bonuses on an accelerated basis and prior to the transaction’s closing, even though its past practice

*277

had been to pay bonuses after the close of the fiscal year. (Sec. Compl. ¶¶ 69-70, 74; Deriv. Compl. ¶¶ 10, 215.) The Securities Complaint asserts that the accelerated payment schedule prevented BofA from later reducing bonus payments, permitted Merrill officers “to reap gigantic bonuses” despite dismal financial results in 2008 and ultimately reduced the value of Merrill before BofA finalized the acquisition. (Sec. Compl. ¶¶ 75-77.) As characterized in the Securities Complaint, negotiations over the bonuses “dragged on for hours,” and “delay[ed]” execution of the Merger Agreement until 2 a.m. on Monday, September 15, 2008 — one hour after Lehman Brothers filed for bankruptcy. (Sec. Compl. ¶ 71.) In press interviews, Lewis later indicated that the bonus negotiations were a source of hard feelings, and characterized the issue as “petty” and “selfish.” (Sec. Compl. ¶ 78.)

The Derivative Complaint alleges that a term sheet prepared on Sunday, September 14 reflected that as a result of the negotiations, BofA “had agreed in principle that Merrill would be authorized to pay a bonus pool that would, at most, be ‘flat to last year’ ... with a maximum recorded expense of $4.5 billion.” (Deriv. Compl. ¶ 120.) BofA and Merrill also agreed that Merrill’s year-end bonuses would be paid in a 60/40 cash/stock split, the same as in 2007, and that “bonus allocations would be made in consultation with BofA.” (Deriv. Compl. ¶ 121.) Taking “headcount changes” into account, the parties agreed that the bonus pool would be $5.8 billion, which was greater than the pool that Merrill previously projected for 2008. (Deriv. Compl. ¶ 122.)

BofA also agreed to allow Merrill to accelerate its incentive bonus payments to December 31, 2008, prior to the closing of the transaction, and “ahead of the disclosure date for Merrill’s fourth-quarter results.” (Deriv. Compl. ¶ 123.)

Fairness Opinion and the BofA Board’s Recommendation of the Merger.

The principal terms of the transaction were negotiated in approximately 24 hours, from late-afternoon on Saturday, September 13, to late-afternoon on Sunday, September 14, 2008. (Deriv. Compl. ¶ 101.) On Sunday, Lewis agreed that BofA would buy Merrill for $50 billion, valuing Merrill stock at $29 per share, which was a 70 percent premium over Merrill’s $17 NYSE closing price the day before. (Sec. Compl. ¶ 66.; Deriv. Compl. ¶ 102.)

According to the Joint Proxy, late on Sunday afternoon, the BofA Directors met with BofA “senior management and its outside advisors.” (Joint Proxy at 50.) At that meeting, BofA’s senior management and the Financial Advisors discussed the results of their due diligence exercise. (Joint Proxy at 55.) J.C. Flowers and FPK each delivered an oral opinion that the exchange ratio of 0.8595 of a share of BofA for every share of Merrill “was fair, from a financial point of view, to [BofA].” (Joint Proxy at 51.) The Joint Proxy would later set forth the full text of the Financial Advisors’ written fairness opinions. The FPK fairness opinion stated that FPK was “of the opinion that, as of the date hereof, the Exchange Ratio to be paid by [BofA] in the Merger is fair, from a financial point of view, to [BofA].” (Joint Proxy at D-3.) The J.C. Flowers opinion stated: “we are of the opinion that as of the date hereof the Exchange Ratio is fair, from a financial point of view, to [BofA].” (Joint Proxy at C-2.) The actions of the Financial Advisors are material to the De

*278

rivative Complaint. They are not named as defendants in the Securities Complaint.

BofA’s general counsel defendant Mayopoulos and BofA’s outside counsel Waehtell, Lipton, Rosen & Katz LLP (“Wachtell”) then advised the board regarding “the legal standards applicable to its decisions and actions with respect to the proposed transaction and reviewed the legal terms of the proposed merger.” (Joint Proxy at 51.) The BofA Board then unanimously voted to approve the transaction. (Joint Proxy at 51.) The two companies signed the Merger Agreement in the early morning of Monday, September 15. (Joint Proxy at 51.) Lewis signed on behalf of BofA, and Thain signed on behalf of Merrill. (Joint Proxy at A-46.)

BofA Announces Secondary Offering.

On October 7, 2008, BofA conducted a secondary offering of common stock, in which it sold 455,000,000 shares at $22 per share, netting proceeds of $9.9 billion (the “Secondary Offering”). (Sec. Compl. ¶ 83.) The Secondary Offering is the basis of claims arising under the '33 Act. (Sec. Compl. ¶¶ 362-395.) According to the plaintiffs, the offering documents expressly incorporated the Merger Agreement and the Form 8-K filing announcing the acquisition; because the documents are alleged to be materially false and misleading, plaintiffs allege that statements made relating to the secondary offering were materially false and misleading. (Sec. Compl. ¶ 201.)

BofA and Merrill Incur Significant Losses in the Fourth Quarter of 2008.

In October and November 2008, while shareholder approval of the transaction was pending, Merrill incurred significant losses. (Sec. Compl. ¶¶ 7, 87; Deriv. Compl. ¶ 168.) In October 2008, Merrill lost approximately $7 billion, (Sec. Compl. ¶ 88; Deriv. Compl. ¶ 20.) Its total losses for October and November exceeded $15 billion. (Sec. Compl. ¶ 90; Deriv. Compl. ¶ 20.) In November, Merrill also took an impairment charge of approximately $2 billion to the value of its goodwill. (Sec. Compl. ¶ 91; Deriv. Compl. ¶ 20.) According to the Securities Complaint, Merrill’s losses were substantial, particularly when contrasted with the $5.8 billion that BofA earned in the first nine months of 2008. (Sec. Compl. ¶ 92.)

According to the Securities Complaint, defendants Lewis, Thain, Price and Cotty were aware of Merrill’s losses as they occurred. (Sec. Compl. ¶ 93.) BofA assigned 200 employees to monitor Merrill’s financial condition. (Sec. Compl. ¶ 93; Deriv. Compl. ¶ 170.) Thain later stated that BofA received frequent updates on Merrill’s financial condition. (Sec. Compl. ¶¶ 93-95.) In press reports, BofA also stated that it was “kept informed of the financial condition” of Merrill. (Sec. Compl. ¶ 96.) Lewis later acknowledged that he was aware of Merrill’s deteriorating financial condition as it occurred in real time. (Sec. Compl. ¶¶ 97-98.) Lewis led weekly calls with the BofA board of directors, which included discussion of Merrill’s fourth quarter losses. (Sec. Compl. ¶ 99.)

According to the Derivative Plaintiffs, the BofA Derivative Defendants “had complete and unfettered access to Merrill’s financial and accounting records beginning no later than September 15, 2008.” (Deriv. Compl. ¶ 162.) This included access to Merrill’s profit and loss reports, “which showed the facts of Merrill’s deteriorating positions.” (Deriv. Compl. ¶ 164.) In addition, “Lewis, Price and other senior executives among the BofA [Derivative] Defendants received weekly reports concerning Merrill’s financial condition beginning immediately after the Merger Agreement

*279

was executed.” (Deriv. Compl. ¶ 165 (emphasis added).)

According to the Securities Complaint, Merrill’s fourth-quarter losses were so significant that BofA management discussed terminating the transaction “on several occasions.” (Sec. Compl. ¶ 100.) Shortly before Thanksgiving, BofA executives began to discuss invoking the MAC. (Sec. Compl. ¶¶ 100-01.) The magnitude of Merrill’s losses was not disclosed to BofA’s shareholders. (Sec. Compl. ¶ 101.) Within BofA, internal disagreements broke out as to whether shareholders should be informed of the Merrill losses in advance of the proxy vote. (Sec. Compl. ¶ 102.)

Meanwhile, BofA’s own losses were growing, making it more difficult to absorb Merrill’s. (Sec. Compl. ¶ 103.) BofA was projecting a first-ever quarterly loss of $1.4 billion. (Sec. Compl. ¶ 103.) BofA executives told the Federal Reserve that BofA, excluding the Merrill acquisition, was “very thinly capitalized .... ” (Sec. Compl. ¶ 103.)

According to the Derivative Plaintiffs, at some point in November, Merrill’s losses became “so severe” that defendant Price sought the advice of Mayopoulos and Wachtell “as to whether BofA should disclose Merrill’s expected fourth quarter losses to BofA shareholders.” (Deriv. Compl. ¶ 167.) After receiving legal advice, BofA decided not to disclose the losses. (Deriv. Compl. ¶ 167.) According to the Derivative Complaint, the BofA Directors “conducted weekly conference calls every Friday starting in September 2008 and continuing through December 2008, [and] could not and should not have been unaware of Merrill’s accelerating losses throughout the fourth quarter.” (Deriv. Compl. ¶ 170.)

The Derivative Plaintiffs allege that Lewis “was aware or should have been aware” of a projected $9 billion fourth-quarter loss at Merrill, “no later than the evening of December 3, 2008, when he received the latest weekly BofA internal report on Merrill.” (Deriv. Compl. ¶ 172 (emphasis omitted).) Plaintiffs allege that “on this occasion” Craig Rosato, BofA’s Chief Accounting Officer sent an email to Lewis, which reported that Merrill’s fourth quarter revenues would need a downward adjustment of $3 billion. (Deriv. Compl. ¶ 172.) This brought Merrill’s fourth quarter loss to $9 billion. (Deriv. Compl. ¶ 172.) The “December 5, 200[8], projection was shared with the BofA Board no later than at its meeting on December 9, 2008.” (Deriv. Compl. ¶ 172.) By December 14, 2008, Merrill’s projected loss had grown to $12 billion. (Deriv. Compl. ¶ 174.)

Joint Proxy Did Not Disclose Merrill’s Growing Fourth Quarter Losses or the Bonus Arrangement.

Following the announcement of the transaction on September 15, 2008, BofA, Merrill and their respective legal counsel “prepared the transactional and disclosure documents relating to the Merger.” (Deriv. Compl. ¶ 126.) BofA was represented by Wachtell, and Merrill was represented by Shearman & Sterling, LLP (“Shear-man”). (Deriv. Compl. ¶ 126.) The agreement regarding bonuses “was memorialized by Wachtell and Shearman” in section 5.2 of a disclosure schedule attached to the Merger Agreement (the “Disclosure Schedule”). (Deriv. Compl. ¶ 127.) According to information provided to the SEC by several individuals, including Lewis, “lawyers ■ at Wachtell and Shearman, and one or more of BofA’s in-house lawyers, including Defendant Mayopolous [sic] ... and Defendant Brenner,” decided to place this information in the Disclosure Schedule, instead of the Merger Agreement. (Deriv. Compl. ¶ 129, 130.) This Disclosure Schedule, which was not available to shareholders prior to voting on the

*280

transaction, provided that incentive bonuses for 2008 “may be awarded at levels that (i) do not exceed $5.8 billion in aggregate value (inclusive of cash bonuses and the grant date of long-term incentive awards) ... and (ii) do not result in 2008 [incentive-related] expense exceeding $4.5 billion.” (Deriv. Compl. ¶ 128 (quoting Disclosure Schedule).)

The terms of the merger were set forth in a definitive Joint Proxy filed with the SEC and mailed to shareholders of record on November 3, 2008. (Sec. Compl. ¶ 205; Deriv. Compl. ¶ 125.) In the Joint Proxy, the BofA Directors solicited proxies to vote on the merger at a special meeting on December 5, 2008. (Deriv. Compl. ¶ 125.)

The Joint Proxy explains to shareholders the terms and conditions of, and the basis for the boards’ recommendations for, the acquisition. (Sec. Compl. ¶ 206; Deriv. Compl. ¶¶ 107-08, 125, 155.) The Joint Proxy begins with a letter to shareholders of BofA and Merrill, which features as its heading the separate corporate logos of the two companies. (Joint Proxy Cover Letter.) The letter is signed by both Lewis and Thain. (Joint Proxy Cover Letter.) Among other things, the letter states that the BofA board unanimously recommended the proposal to issue the shares necessary to purchase Merrill. (Joint Proxy Cover Letter.) By the Court’s count, the Joint Proxy incorporates by reference 78 separate SEC filings of either BofA or Merrill. (Joint Proxy at 123-24.)

The Joint Proxy also attaches a copy of the Merger Agreement. It describes the Merger Agreement as “subject to important qualifications and limitations agreed to between the parties,” which “may have been included in the agreement for the purpose of allocating risk between the parties rather than to establish matters as facts.” (Joint Proxy at 125.) It asserted that certain “materials” are intended “only to provide you with information regarding the terms and conditions of the agreements, and not to provide any other factual information....” (Joint Proxy at 125.) The Joint Proxy advised that provisions of the Merger Agreement “should not be read alone,” but rather, in conjunction with the Joint Proxy and filings incorporated by reference. (Joint Proxy at 125.) Elsewhere, the Joint Proxy stated, “We urge you to read the merger agreement carefully and in its entirety, as it is the legal document governing the merger.” (Joint Proxy at 76.)

The Joint Proxy did not disclose the losses of Merrill or BofA in the fourth quarter of 2008, or disclose that bonuses were to be paid to Merrill personnel prior to the transaction’s closing. (Sec. Compl. ¶¶ 106, 207; Deriv. Compl. ¶¶ 232(g)-(j), 233(a).) According to both complaints, the Joint Proxy falsely stated that there had been an “absence of material adverse changes” to Merrill’s financial conditions. (Sec. Compl. ¶ 107; Deriv. Compl. ¶ 233(b).) Both complaints assert that the Joint Proxy’s incorporation by reference of a March 2008 proxy statement issued by Merrill adopted that proxy’s representation that Merrill would not pay discretionary bonuses prior to January. (Sec. Compl. ¶ 108; Deriv. Compl. ¶ 232(j).) All plaintiffs contend that the Joint Proxy’s representations as to the Merrill bonuses were false and misleading because Merrill had negotiated with BofA to pay up to $5.8 billion in bonuses and to make those payments earlier than in prior years, on a timeline prior to the transaction’s closing. (Sec. Compl. ¶¶ 214-20; Deriv. Compl. ¶¶ 232(g)-©.)

BofA filed proxy supplements on November 21, and November 26, 2008. (Sec. Compl. ¶ 221; Deriv. Compl. ¶ 239.) In the second proxy supplement Lewis stated that “Bank of America is positioned to ride

*281

out this severe economic storm.” (Sec. Compl. ¶ 222; Deriv. Compl. ¶ 239.) Lewis also made statements about BofA’s capital and liquidity positions, and stated that, although BofA had received a capital injection from the federal government, “th[ose] were funds that [BofA] did not need and did not seek.” (Sec. Compl. ¶ 222; Deriv. Compl. ¶ 239.) By the beginning of December 2008, Merrill had incurred approximately $15.3 billion in losses, including its $2 billion impairment charge taken to the value of corporate goodwill. (Sec. Compl. ¶ 209; Deriv. Compl. ¶¶ 20, 240.)

All plaintiffs allege that the failure to disclose Merrill’s losses rendered statements in the Joint Proxy false and misleading. (Sec. Compl. ¶ 211; Deriv. Compl. ¶ 233(a).) According to plaintiffs, Merrill’s losses in the fourth quarter amounted to material adverse changes to its financial condition, as was evidenced by BofA’s deliberations about invoking the MAC provision of the Merger Agreement. (Sec. Compl. ¶ 211; Deriv. Compl. ¶¶ 233(b) & (e).) As noted, the Joint Proxy represented that no material adverse change had occurred in Merrill’s financial condition. (Sec. Compl. ¶ 212; Deriv. Compl. ¶ 233(b).)

Consideration of the Invocation of the MAC Clause and the Offer of Federal Capital Support.

Shareholders of BofA and Merrill voted to approve the transaction on December 5, 2008. (Sec. Compl. ¶¶ 112, 225; Deriv. Compl. ¶¶ 1, 176.) On December 9, defendants Lewis and Price met with BofA’s board of directors to discuss Merrill’s financial condition. (Sec. Compl. ¶ 113.) According to the Securities Complaint, Price estimated that Merrill would lose $9 billion after taxes, and described the scope of loss as “quite significant.” (Sec. Compl. ¶ 113.) The Derivative Complaint alleges that by December 5, 2008, Lewis was aware of a revised projection that Merrill would incur a $9 billion after-tax loss for the fourth quarter. (Deriv. Compl. ¶ 172.)

In light of the accumulating losses, Lewis considered exercising BofA’s right to terminate the transaction prior to the closing, as the MAC provision contemplated. (Sec. Compl. ¶ 113; Deriv. Compl. ¶¶ 181, 183.) He called Treasury Secretary Paul-son on December 17, 2008. (Sec. Compl. ¶ 114; Deriv. Compl. ¶ 185.) Lewis told Paulson that BofA was “strongly considering” invoking the MAC and terminating the acquisition. (Sec. Compl. ¶ 114; Deriv. Compl. ¶ 185.)

At Paulson’s instruction, Lewis traveled to Washington, D.C. for a face-to-face meeting at the Federal Reserve. (Sec. Compl. ¶ 114; Deriv. Compl. ¶ 186.) Attendees included Paulson and Ben Bernanke, the chairman of the Federal Reserve Board (the “Fed”). (Sec. Compl. ¶ 115; Deriv. Compl. ¶ 186.) Lewis stated that BofA was facing its first-ever quarterly loss, and that Merrill’s losses were so large that they threatened BofA’s solvency. (Sec. Compl. ¶ 115.) Lewis said that BofA intended to invoke the MAC, stating that BofA learned of the losses only in mid-December. (Sec. Compl. ¶ 115.) Bernanke and Paulson urged Lewis not to invoke the MAC. (Sec. Compl. ¶ 116; Deriv. Compl. ¶ 186.)

According to the Securities Complaint, Lewis then requested “a taxpayer bailout,” including a $50 billion guarantee of assets, as a condition to proceeding with the transaction. (Sec. Compl. ¶ 116.) He agreed to provide the Fed with information about the companies’ fourth-quarter performances and risk exposures. (Sec. Compl. ¶ 116.) After reviewing the materials, Fed officials concluded that Lewis’s claim of surprise at Merrill’s losses was not credible. (Sec. Compl. ¶ 117; Deriv. Compl. ¶ 115.)

*282

On December 19, Lewis and Price again spoke to Paulson and Bernanke, stating that Merrill’s pre-tax losses exceeded $21 billion, and that the MAC would be invoked. (Sec. Compl. ¶ 124.) Lewis indicated that the deal would proceed only if the federal government agreed to purchase Merrill’s toxic assets, or else guaranteed BofA against any losses arising from them. (Sec. Compl. ¶ 124.) Officials countered that invoking the MAC would raise questions from the public about BofA’s diligence, financial condition and management. (Sec. Compl. ¶ 125.)

According to the Derivative Complaint, on December 21, the “BofA Board determined that going through with the Merger would jeopardize BofA’s existence as a going concern and that — despite the urgings of Fed officials — it was in [BofA’s] best interests to invoke the MAC clause and terminate the Merger.” (Deriv. Compl. ¶ 188 (emphasis added).) When Lewis informed Secretary Paulson of this decision, Paulson told Lewis that if BofA invoked the MAC clause, Paulson would remove BofA’s directors and management from their positions. (Sec. Compl. ¶ 126; Deriv. Compl. ¶ 188.)

The Derivative Complaint alleges that Lewis called a board meeting for 4:00 p.m. of the next day, December 22, 2008. (Deriv. Compl. ¶ 191.) Throughout the evening of December 21, 2008, according to the Derivative Complaint, Lewis “canvassed fellow Board members informally to determine whether the Board would opt to preserve their jobs and support management’s recommendation not to invoke the MAC....” (Deriv. Compl. ¶ 193.) All of the directors, except Patricia Mitchell and Jackie Ward attended the meeting. (Deriv. Compl. ¶ 196.) At that meeting, the board agreed not to invoke the MAC clause. (Deriv. Compl. ¶ 196.) Lewis subsequently informed Paulson and Bernanke that BofA would go forward with the acquisition. (Sec. Compl. ¶¶ 127-28; Deriv. Compl. ¶ 197.)

Lewis feared that consummation of the transaction could subject BofA to shareholder suits. (Sec. Compl. ¶ 129; Deriv. Compl. ¶ 199.) He approached Fed officials to request measures to shield BofA from potential liability. (Sec. Compl. ¶¶ 129-31; Deriv. Compl. ¶ 199.) Bernanke and Fed General Counsel Scott Alvarez discussed BofA’s potential shareholder liability in completing the acquisition. (Sec. Compl. ¶¶ 129-31; Deriv. Compl. ¶¶ 199-200.) Partly acting under Alvarez’s advice, Bernanke declined to take any actions that would limit BofA’s liability. (Sec. Compl. ¶¶ 129-31.)

BofA did, however, receive a $138 billion “taxpayer bailout,” which consisted of a $20 billion capital infusion and a $118 billion guarantee against losses on certain risky assets, mainly those acquired from Merrill. (Sec. Compl. ¶ 132; Deriv. Compl. ¶ 21.) According to the Securities Complaint, Lewis told the BofA board that “the verbal commitment of the Fed and Treasury” was material to management’s recommendation to close on the acquisition. (Sec. Compl. ¶ 133.) As characterized in the Securities Complaint, “Lewis concealed the bailout from investors.” (Sec. Compl. ¶ 134.) He told the BofA board that the Company would not enter into a written agreement concerning federal funds, because he could not risk public disclosure of government loans prior to closing of the transaction. (Sec. Compl. ¶¶ 134, 136; Deriv. Compl. ¶¶ 197-98, 201.) Rather, according to both sets of plaintiffs, BofA concluded that the $138 billion package would be disclosed at the time of the Company’s earnings release on January 20, 2009. (Sec. Compl. ¶ 136; Deriv. Compl. ¶ 202.)

*283

The Securities Plaintiffs allege that the defendants unlawfully failed to disclose, among other things, the role of federal officials in urging the completion of the transaction and providing funds to BofA, and the full scope of quarterly losses suffered by BofA and Merrill. (Sec. Compl. ¶¶ 228-29.) Similarly, the Derivative Plaintiffs allege that the BofA Derivative Defendants breached their fiduciary duty to BofA by failing to disclose the “devastating losses” at Merrill, the board’s initial belief that a material adverse event had arisen, and federal involvement in exercising the MAC clause and providing financial support. (Deriv. Compl. ¶ 314(c).)

BofA Announces Fourth Quarter Results and Federal Financial Support.

BofA’s acquisition of Merrill closed on January 1, 2009. (Sec. Compl. 11139; Deriv. Compl. ¶ 177.) According to the Securities Complaint, “analysts had previously estimated” that BofA would report quarterly earnings of $.08 per share. (Sec. Compl. ¶ 140.) However, rumors began to circulate in the financial press and in the investment community about anticipated losses. On or around January 12, 2009, a Citigroup analyst reported that BofA might report a $3.6 billion loss for the fourth quarter of 2008, and cut dividends from $0.32 to $0.05 per share. (Sec. Compl. ¶263.) The next trading day, BofA shares fell from $12.99 to $11.43. (Sec. Compl. ¶ 263.) As rumors of losses circulated in the press, the stock price dropped to $8.32 at the close of trading on January 15. (Sec. Compl. ¶¶ 262-65.)

On January 16, 2009, BofA disclosed the previous quarter’s performances of BofA and Merrill and the federal funding. (Sec. Compl. ¶ 145; Deriv. Compl. ¶ 243.) That morning, the Treasury Department also disclosed the funding package. (Sec. Compl. ¶ 144.) Later in the morning, BofA announced that Merrill’s after-tax loss for the fourth quarter of 2008 totaled $15.31 billion (more than $21 billion before taxes), that BofA’s quarterly losses totaled $1.8 billion, and that the federal government was providing $20 billion in capital to BofA while agreeing to provide protection against further losses on $118 billion of assets. (Sec. Compl. ¶ 145; Deriv. Compl. ¶ 243.) According to the Securities Complaint, the quarterly results for both BofA and Merrill were far below previous analyst estimates. (Sec. Compl. ¶ 145.)

That same day, Lewis stated that BofA needed the federal “bailout” to absorb Merrill’s losses. (Sec. Compl. ¶ 147.) After the markets closed that day, the ratings agency Moody’s downgraded BofA’s credit rating, and Fitch downgraded Merrill’s rating to an “F.” (Sec. Compl. ¶¶ 150, 266.) Over the weekend, BofA and Merrill were subjects of negative press accounts and analyst reports. (Sec. Compl. ¶¶ 151-52.) On January 20, 2009, which was the next trading day, BofA shares declined to $5.10, representing a decline of an additional 29%. (Sec. Compl. ¶¶ 153, 267.)

News broke of Merrill’s bonus arrangement, with estimates that the payments totaled approximately $3 to 4 billion. (Sec. Compl. ¶ 155.) On January 22, 2009, Lewis terminated Thain. (Sec. Compl. ¶ 156.) That day, BofA’s share price dropped from $6.68 per share to $5.71. (Sec. Compl. ¶ 161.) According to the Securities Complaint, from January 12 to January 22, 2008, the price of BofA’s preferred stock fell, on average, 32%. (Sec. Compl. ¶ 269.)

After the end of the class period, details about the transaction continued to draw press attention, as well as investigations from state and federal regulators. (Sec. Compl. ¶¶ 162-65, 169-77.) In April 2009, BofA shareholders voted to terminate Lewis’s position as chairman of BofA’s board. (Sec. Compl. ¶ 166.) Between

*284

May 2009 and the filing of the Securities Complaint, “several” BofA directors and officers resigned. (Sec. Compl. ¶ 168.)

Claims Asserted in the Securities Complaint.

Counts I through VI of the Securities Complaint assert claims pursuant to the '34 Act. Counts I and II of the Securities Complaint assert that defendants BofA, Merrill, Thain, Lewis, Price and Cotty violated Section 10(b) of the '34 Act and Rule 10b-5 promulgated thereunder. (Sec. Compl. ¶¶ 286-310.) Counts HI, IV and VI variously assert claims of control person liability against defendants Lewis, Price, Thain and the BofA Board of Directors pursuant to section 20(a) of the '34 Act, 15 U.S.C. § 78t(a). (Sec. Compl. ¶¶ 311-26, 352-61.) Count V asserts a violation of Section 14(a) of the '34 Act, 15 U.S.C. § 78n(a) and Rule 14a-9 promulgated thereunder, against BofA, Merrill, Lewis, Thain, Price, Cotty and the BofA directors, asserting that the Joint Proxy contained material misstatements and omissions, and was not sufficiently updated. (Sec. Compl. ¶¶ 335-351.)

Counts VII through IX are asserted pursuant to the '33 Act, and brought on behalf of persons and entities that purchased BofA common stock in the secondary offering of October 2008. Plaintiffs allege that the offering documents contained untrue statements and material omissions. (Sec. Compl. ¶ 364.) Count VII asserts that defendants BofA, Lewis, Price, Cotty, and the Underwriter Defendants unlawfully violated Section 11 of the '33 Act, 15 U.S.C. § 77k, because the secondary offering registration statement contained material omissions and misstatements. (Sec. Compl. ¶¶ 372-382.) Count VIII asserts that BofA and the Underwriter Defendants violated Section 12(a)(2) of the '33 Act, 15 U.S.C. §

111

(a)(2), by setting forth untrue statements and omissions in the secondary offering registration statement. (Sec. Compl. ¶¶ 383-90.) Count IX asserts that Lewis, Price and the BofA directors violated Section 15 of the '33 Act, 15 U.S.C. §

llo,

by failing to disclose “accurate and truthful information” about BofA’s financial condition and results in connection with the secondary offering. (Sec. Compl. ¶¶ 391-95.)

Claims Asserted in the Derivative Complaint.

Counts I, II and VI assert derivative claims on behalf of BofA against the BofA Derivative Defendants and the Financial Advisors for breach of fiduciary duty. (Deriv. Compl. ¶¶ 312-20, 336-38.) Count III asserts a derivative claim against the Financial Advisors for professional negligence. (Deriv. Compl. ¶¶ 321-24.) Count IV asserts a derivative claim against the BofA Officers and others for unjust enrichment. (Deriv. Compl. ¶¶ 325-31.) Court V asserts a derivative claim for contribution against the BofA Derivative Defendants. (Deriv. Compl. ¶¶ 332-35.) Count VII asserts claims against certain defendants for aiding and abetting the BofA Derivative Defendants’ breaches of fiduciary duty. (Deriv. Compl. ¶¶ 339^5.) The final derivative claim is contained in Count VIII, which asserts a claim against the BofA Derivative Defendants and the Financial Advisors for violations of Section 14(a) and Rule 14a-9. (Deriv. Compl. ¶¶ 346-56.) Finally, in Count IX, the Derivative Plaintiffs assert a direct claim against the BofA Derivative Defendants for breach of fiduciary duty on behalf of the putative class. (Deriv. Compl. ¶¶ 357-61.)

II.

PROCEDURAL HISTORY

On June 11, 2009, the Judicial Panel on Multidistrict Litigation transferred various private actions arising out of BofA’s acquisition of Merrill to Judge Denny Chin,

*285

then of this District, for consolidated pretrial proceedings. 28 U.S.C. § 1407 (MDL Docket # 1). In June and July of 2009, Judge Chin consolidated for all purposes a number of securities actions and appointed lead plaintiffs and lead counsel for the Securities Action. (MDL Docket # # 2, 15.) At the same time, Judge Chin consolidated for all purposes several derivative actions and appointed interim lead plaintiffs and co-lead counsel. (MDL Docket # # 2, 16.) The Securities Plaintiffs filed the Consolidated Amended Class Action Securities Complaint on September 25, 2009. (MDL Docket #29.) The Derivative Plaintiffs filed the Consolidated Shareholder Derivative and Class Action Complaint on October 9, 2009. (MDL Docket #39.)

Three separate motions to dismiss the Securities Complaint were filed on November 24, 2009. They were respectively file-don behalf of (1) BofA, Banc of America, and all BofA officers and directors named as defendants; (2) Thain; and (3) Merrill and MLPFS. Thain and Merrill incorporate the arguments set forth by the BofA defendants. The plaintiffs filed a single memorandum in opposition to the motions. On December 8, 2009, the BofA Derivative Defendants, BofA as nominal defendant, the Financial Advisors, and several other individuals (the “Derivative Merrill Defendants”) filed motions to dismiss the Derivative Complaint. Plaintiffs voluntarily dismissed their claims against the Derivative Merrill Defendants on February 2, 2009. While the current motions to dismiss were pending, Judge Chin was elevated to the United States Court of Appeals for the Second Circuit, and the action was reassigned to me. (MDL Docket # 250.)

The Derivative Plaintiffs were directed to amend the Derivative Complaint to include allegations regarding the citizenship of the Financial Advisors. (MDL Docket ## 279, 289.) Although that complaint has not yet been filed, the amendments will solely relate to allegations concerning diversity jurisdiction. Because the substantive allegations will be identical to those of the original Derivative Complaint, the defendants in the Derivative Action were not required to file new motions to dismiss.

DISCUSSION

RULE 12(b)(6), RULE 9(b) AND THE PSLRA’S PLEADING THRESHOLD.

Pursuant to Rule 12(b)(6), Fed.R.Civ.P., “[t]o survive a motion to dismiss, a complaint must plead ‘enough facts to state a claim to relief that is plausible on its face.’ ”

ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co.,

553 F.3d 187, 196 (2d Cir.2009) (quoting

Ruotolo v. City of New York,

514 F.3d 184, 188 (2d Cir.2008)). “A pleading that offers ‘labels and conclusions’ or ‘a formulaic recitation of the elements of a cause of action will not do.’”

Iqbal,

129 S.Ct. at 1949 (quoting

Bell Atlantic Corp. v. Twombly,

550 U.S. 544, 555 , 127 S.Ct. 1955 , 167 L.Ed.2d 929 (2007)).

Along with the standards of Rule 12(b)(6), “[a]ny complaint alleging securities fraud must satisfy the heightened pleading requirements of the PSLRA and Fed.R.Civ.P. 9(b) by stating with particularity the circumstances constituting fraud.”

ECA Local 134,

553 F.3d at 196 (citing

Tellabs Inc. v. Makor Issues & Rights. Ltd.,

551 U.S. 308 , 127 S.Ct. 2499 , 168 L.Ed.2d 179 (2007)).

Rule 9(b) requires a party to “state with particularity the circumstances constituting fraud or mistake.” This pleading threshold gives a defendant notice of the plaintiffs claim, safeguards a defendant’s reputation from “improvident” charges and protects against strike suits.

See ATSI Commc’ns, Inc. v. Shaar Fund, Ltd.,

493

*286

F.3d 87, 99 (2d Cir.2007). “A securities fraud complaint based on misstatements must (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent.”

Id.

at 99 (citing

Novak v. Kasaks,

216 F.3d 300, 306 (2d Cir.2000)). Allegations of fraud may be “too speculative even on a motion to dismiss,” particularly when premised on “ ‘distorted inferences and speculations.’ ”

Id.

at 104 (quoting

Segal v. Gordon,

467 F.2d 602, 606, 608 (2d Cir.1972)).

The PSLRA, for its part, has “imposed heightened pleading requirements and a loss causation requirement upon ‘any private action’ arising from the Securities Exchange Act.”

Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc.,

552 U.S. 148, 165 , 128 S.Ct. 761 , 169 L.Ed.2d 627 (2008) (quoting 15 U.S.C. § 78u-4(b)). It requires a complaint to “specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.” 15 U.S.C. § 78u-4(b)(1). Put differently, the PSLRA “insists that securities fraud complaints ‘specify’ each misleading statement; that they set forth the facts ‘on which [a] belief that a statement is misleading was ‘formed’; and that they ‘state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.’”

Dura Pharms., Inc. v. Broudo,

544 U.S. 336, 345 , 125 S.Ct. 1627 , 161 L.Ed.2d 577 (2005) (quoting 15 U.S.C. § 78u-4(b)(1), (2)). As the Second Circuit has repeatedly required, plaintiffs “must do more than say that the statements ... were false and misleading; they must demonstrate with specificity why and how that is so.”

Rombach v. Chang,

355 F.3d 164, 174 (2d Cir.2004);

accord ATSI,

493 F.3d at 99 (“A securities fraud complaint based on misstatements must ... explain why the statements were fraudulent. Allegations that are conelusory or unsupported by factual assertions are insufficient.”) (citations omitted).

The PSLRA also “requires plaintiffs to state with particularity ... the facts evidencing scienter,

i.e.,

the defendant’s intention ‘to deceive, manipulate, or defraud.’”

Tellabs,

551 U.S. at 313 , 127 S.Ct. 2499 (quoting

Ernst & Ernst v. Hochfelder,

425 U.S. 185 , 194 & n. 12, 96 S.Ct. 1375 , 47 L.Ed.2d 668 (1976)). To qualify as “strong,” the “inference of scienter must be more than merely plausible or reasonable — it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.”

Id.

at 314 , 127 S.Ct. 2499 .

Although the Second Circuit has not directly addressed the issue, other courts have concluded that Section 14(a) allegations must identify with precision any misleading statements or omitted material facts pursuant to the PSLRA, 15 U.S.C. § 78u-4(b)(1).

See, e.g., New York City Emps.’ Ret. Sys. v. Jobs,

593 F.3d 1018 , 1023 (9th Cir.2010);

Beck v. Dobrowski,

559 F.3d 680, 681-82 (7th Cir.2009) (Posner, J.);

DCML LLC v. Danka Bus. Sys. PLC,

No. 08 Civ. 5829(SAS), 2008 WL 5069528 , at *1 (S.D.N.Y. Nov. 26, 2008). The relationships between Sections 10(b), 14(a) and the PSLRA are discussed in greater detail below.

II.

TRAIN AND MERRILL’S MOTIONS TO DISMISS COUNT II OF THE SECURITIES COMPLAINT ARE GRANTED IN PART AND DENIED IN PART.

In the Securities Action, Defendants Thain and Merrill argue that the Securi

*287

ties Complaint fails to allege fraud with the particularity required by the PSLRA, and also contend that the '34 Act claims are misplaced because there is no duty extending from Merrill and its officers to the shareholders of BofA. For the reasons explained below, the motions of Merrill and Thain are granted in part and denied in part.

Thain and Merrill Had No Disclosure Duty to BofA Shareholders.

According to Merrill, its duties and obligations extended to its own shareholders, but not to the shareholders of BofA. Because of its own distinct duties and the necessarily adverse interests of parties to an acquisition, Merrill asserts, there was no disclosure duty extending from Merrill to BofA shareholders, and thus no basis for liability. Thain joins in Merrill’s argument.

Nondisclosure claims asserted under Section 10(b) and Rule 10b-5 are premised on the existence of a fiduciary or similar obligation extending from a defendant to a shareholder.

Chiarella v. United States,

445 U.S. 222, 232 , 100 S.Ct. 1108 , 63 L.Ed.2d 348 (1980) (a plaintiff asserting claims under Section 10(b) and Rule 10b-5 must “identify a relationship between [the defendant] and the [plaintiffs] that could give rise to a duty”). “[0]ne who fails to disclose material information prior to the consummation of a transaction commits fraud only when he is under a duty to do so.”

Id.

at 228 , 100 S.Ct. 1108 . The duty to disclose “arises when one party has information that the other [party] is entitled to know because of a fiduciary or other similar relation of trust and confidence between them.”

Id.

at 228-29 , 100 S.Ct. 1108 (quotation marks omitted; alteration in original). “[A] complete stranger who dealt with the sellers only through impersonal market transactions”

does not have an obligation to shareholders.

Id.

at 232-33 , 100 S.Ct. 1108 .

Chiarella

held that an employee of a financial printing firm who traded on the basis of material, nonpublic information could not be liable under Section 10(b) and Rule 10b-5 because he owed no duty to shareholders, and thus was under no duty to disclose his knowledge. 445 U.S. at 232-33 , 100 S.Ct. 1108 ;

see also

SEC’s Titan Report, 2005 WL 1074830 , at *2 (“[W]here a document containing such a representation is disclosed, if additional material facts exist, such as those contradicting or qualifying the disclosure of the original representation ... omission of which makes that disclosure misleading, a company would also be required to disclose those facts.”). In this instance, Merrill’s bonus scheme is portrayed merely as a contingent event, when, in fact, the negotiations resulted in an agreement as to both the amount and the timing of bonus payment. There was “a great probability” that the bonuses were to be awarded and paid.

Wilson,

855 F.2d at 993 .

The disclosure of the Merger Agreement’s covenant that Merrill “shall not ... pay any amounts to Employees not required by any current plan or agreement (other than base salary in the ordinary course of business) ...” was an affirmative statement that was arguably misleading in view of the undisclosed agreement on preclosing bonus payments,

Press Reports and Past Merrill SEC Filings Did Not Render the Joint Proxy Immaterial or Establish Truth on the Market as a Matter of Law at the Rule 12(b)(6) Stage.

The BofA defendants argue that in SEC filings and other public statements, Merrill placed the plaintiffs on notice as to its bonus practices. They additionally argue that reports in the press, which anticipated bonus payouts at Merrill, placed shareholders on notice of Merrill’s practices. For these reasons, they argue, among other things, that the failure to disclose the bonus arrangement was immaterial.

In an October 16, 2008 press release filed via Form 8-K, Merrill stated that it had thus far accrued compensation and benefit expenses of $11.2 billion for the first nine months of 2008. (Oct. 16, 2008 8-K, at Goldin Dec. Ex. 25.) In a Merrill proxy statement of March 2008, which was distributed in advance of the company’s annual shareholder meeting, Merrill emphasized the importance of retaining talented employees, stating that competitive pay was one route to employee retention. (Goldin Dec. Ex. 7 at 28.) It stated that Merrill “emphasize[s] variable pay as the core of [its] compensation policy,” including an annual incentive bonus that is “[p]aid in January for performance in the prior fiscal year.” (Goldin Dec. Ex. 7 at 28.) Merrill filed its Form 10-Q for the third quarter of 2008 on November 5, 2008, and cited “Non-interest expenses” as including “Compensation and benefits” in the amount of $11.17 billion. (Goldin Dec. Ex. 34 at 5.)

Defendants argue that these filings, which were incorporated by reference into the Joint Proxy (Joint Proxy at 124), left it “apparent to any investor” that base salary constituted “only a portion of the $ 11.17 billion in compensation expense” accrued in the first three quarters of 2008. (BofA Sec. Mem. at 18.) They further argue that media reports in outlets such as CNN, Bloomberg News, The New York Times, NBC and Fox News discussed anticipated Merrill bonuses in October 2008, with estimated total payouts ranging from $3 billion to $6 billion. (BofA Sec. Mem. at 19-20.) Cumulatively, the defendants argue, the SEC filings and the press reports informed the investing public that Merrill would pay employee bonuses. (BofA Sec. Mem. at 16.)

It is true that Merrill’s filings reflected the compensation expenses for 2008, but plaintiffs’ theory of liability is not that Merrill accumulated excessive funds for employee compensation. Rather, the Securities Complaint posits that the proxy materials gave the false impression,

*301

through misstatement and omission, that Merrill compensation would be limited to payments required by a preexisting plan or agreement. In essence, the Securities Complaint’s theory is that BofA secretly consented to $5.8 billion in bonus awards, which later resulted in $3.6 billion of payments that might have been materially lower if BofA had effective control over the amount of the payments after closing.

The timing of the Merrill bonuses contradicts past statements of company policy. Merrill’s proxy of March 2008 expressly stated that employee bonuses were to be “[p]aid in January for performance in the prior fiscal year.” (Goldin Dec. Ex. 7 at 28.) A reasonable shareholder could have concluded that any bonus payments would then fall under the post-closing oversight of BofA. The defendants argue that the proxy’s representation as to the timing of bonuses should be disregarded, since a “general description” of “compensation philosophy” for bonuses would not necessarily apply in the event that Merrill were to be acquired. (BofA Sec. Mem. at 24.) The defendants’ selective reading of the March 2008 proxy amounts to cherry picking. If representations of general “compensation philosophy” cannot apply to Merrill in light of acquisition-related activities, neither, then, should Merrill’s other March 2008 statements of “compensation philosophy” be considered applicable, including its stated practice of administering bonus payments or offering competitive salaries as a means of retaining talented employees. (Goldin Dec. Ex. 7 at 28; BofA Sec. Mem. at 18.)

Along with their reliance on Merrill’s SEC filings, the defendants argue that press reports anticipated the bonuses in a way that placed the investing public on notice of their eventual payment. Because of these press reports, the defendants argue, any failure to disclose the bonus arrangement was immaterial, and not in violation of the securities laws. “An omission is material if there is ‘a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available.’ ”

Halperin v. eBanker USA.com, Inc.,

295 F.3d 352, 357 (2d Cir.2002) (quoting

Basic Inc. v. Levinson,

485 U.S. 224, 231-32 , 108 S.Ct. 978 , 99 L.Ed.2d 194 (1988)). “Recognizing that the materiality of an omission is a mixed question of law and fact, courts often will not dismiss a securities fraud complaint at the pleading stage of the proceedings, unless reasonable minds could not differ on the importance of the omission.”

Id.

“The touchstone of the inquiry is not whether isolated statements within a document were true, but whether defendants’ representations or omissions, considered together and in context, would affect the total mix of information and thereby mislead a reasonable investor regarding the nature of the securities offered.”

Id.

“At the pleading stage, a plaintiff satisfies the materiality requirement of Rule 10b-5 by alleging a statement or omission that a reasonable investor would have considered significant in making investment decisions.”

Ganino v. Citizens Utils. Co.,

228 F.3d 154 , 161 (2d Cir.2000). A fact is immaterial “if the information is trivial,” or “is so basic that any investor could be expected to know it.”

Id.

at 162 (quotation marks omitted). “Materiality is determined in light of the circumstances existing at the time the alleged misstatement occurred.”

Id.

at 165.

Under the “truth on the market” theory, “a misrepresentation is immaterial if the information is already known to the market because the misrepresentation cannot then defraud the market.”

Id.

at 167. In asserting a truth on the market defense, a defendant attempts to refute

*302

the argument that its misrepresentations affected stock price, because the truth already was known.

Id.

Such information must be communicated “ ‘with a degree of intensity and credibility sufficient to counter-balance effectively any misleading information created by’ the alleged misstatements.”

Id.

(quoting

In re Apple Computer Sec. Litig.,

886 F.2d 1109, 1116 (9th Cir.1989)). “A truth-on-the-market defense is intensely fact-specific and is rarely an appropriate basis for dismissing a § 10(b) complaint for failure to plead materiality.”

Id.; see also In re Columbia Sec. Litig.,

155 F.R.D. 466, 482-83 (S.D.N.Y.1994) (“[D]efendants’ burden [in establishing truth on the market] is extremely difficult, perhaps impossible, to meet at the summary judgment stage.”);

cf. Kronfeld v. Trans World Airlines, Inc.,

832 F.2d 726, 736 (2d Cir.1987) (“There are serious limitations on a corporation’s ability to charge its stockholders with knowledge of information omitted from a document such as a proxy statement or prospectus on the basis that the information is public knowledge and otherwise available to them.”).

On a motion to dismiss, a court may take judicial notice of the publication of a newspaper article without converting the motion into one for summary judgment, provided that consideration is limited to the fact of publication and not the truth of the article’s content.

See, e.g., Condit v. Dunne,

317 F.Supp.2d 344, 357-58 (S.D.N.Y.2004) (collecting cases);

In re Merrill Lynch & Co., Inc. Research Reports Sec. Litig.,

272 F.Supp.2d 243 , 251 n. 5 (S.D.N.Y.2003). However, I am unable to say at the Rule 12(b)(6) stage, without further context, whether the cited articles speak to the Merrill bonuses with “a degree of intensity and credibility” that effectively counterbalances language in the Merger Agreement and Joint Proxy.

Ganino,

228 F.3d at 167 ;

see also In re eSpeed, Inc. Sec. Litig.,

457 F.Supp.2d 266, 288 (S.D.N.Y.2006) (a “collection of news articles” and “bad publicity” fail to establish truth on the market for Rule 12(b)(6) purposes);

In re Comverse Tech., Inc. Sec. Litig.,

543 F.Supp.2d 134, 150 (E.D.N.Y. 2008) (press release insufficient to establish truth on the market at Rule 12(b)(6) stage).

The defendants’ motions, to the extent premised on an immateriality or “truth on the market” argument addressed to the bonus arrangement, is denied. Consistent with my previous discussion of Thain and Merrill, the Section 10(b) and Rule 10b-5 claims against them may proceed only to the extent that liability is premised on the theory that the bonus language materially misstated facts, and not to the extent that material information was omitted. The scienter allegations relating to the bonus arrangement are addressed below.

For Substantially the Same Reasons, the Derivative Complaint Adequately States a Claim under Section 14-(q) and Rule U.a-9.

With slight factual variations, the Derivative Plaintiffs assert the same theory as to why non-disclosure of the bonus arrangement violated Section 14(a) and Rule 14a-9. According to the Derivative Plaintiffs, as of September 14, 2008, BofA “had

*303

agreed in principle that Merrill would be authorized to pay a bonus pool that would, at most, be ‘flat to last year’ ... with a maximum recorded expense of $4.5 billion.” (Deriv. Compl. ¶ 120.) This agreement was reflected in a term sheet. (Deriv. Compl. ¶ 120.) Taking increased head count into account, the Complaint asserts that the BofA Defendants approved a “flat” bonus pool of $5.8 billion. (Deriv. Compl. ¶ 122.) The Derivative Complaint also alleges that the bonus agreement was one of five significant issues negotiated by BofA and Merrill. (Deriv. Compl. ¶ 101.)

As detailed above, I already have concluded that Securities Plaintiffs have adequately pled that the qualifying language in the Joint Proxy and Merger Agreement did not disclose the true bonus agreement between BofA and Merrill. That conclusion applies with equal force to the Derivative Complaint, as does the determination that the Securities Complaint adequately alleges that the Merrill bonuses were material.

Securities Complaint Adequately Alleges the Materiality of Defendants’ Omissions Concerning Fourth Quarter 2008 Losses,

The defendants in the Securities Action also move to dismiss the '34 Act claims arising out of the deteriorating financial conditions at Merrill and BofA in the fourth quarter of 2008. Plaintiffs contend that the defendants failed to disclose $15 billion in losses at Merrill in October and November 2008, just as BofA was experiencing its first quarterly loss in company history.

According to the Securities Complaint, in October 2008, during the time between the transaction’s announcement and the filing of the Joint Proxy, Merrill lost approximately $7 billion. (Sec. Compl. ¶ 88.) In an interview with the PBS program “Frontline,” Thain later stated, “October was by far the worst.” (Sec. Compl. ¶ 88.) Merrill continued losing approximately $1 billion a week in November, and also incurred an impairment charge to goodwill of approximately $2 billion. (Sec. Compl. ¶¶ 89-91.)

The Securities Complaint alleges that BofA was aware of these losses as they occurred, and assigned approximately 200 of its employees to monitor Merrill’s financial condition. (Sec. Compl. ¶ 93.) The Securities Complaint asserts that BofA executives “personally received regular updates as the fourth quarter progressed.” (Sec. Compl. ¶ 94.) According to Thain, Merrill generated daily profit and loss statements, which were contemporaneously reviewed by BofA. (Sec. Compl. ¶ 95.) In Congressional testimony, Lewis stated that Merrill distributed “detailed financial reports every week” after the Merger Agreement was signed in September. (Sec. Compl. ¶ 97.) The Securities Complaint alleges that there were internal disagreements within BofA as to whether the ongoing losses should be disclosed to shareholders. (Sec. Compl. ¶ 102.)

The defendants first argue that, as a matter of law, BofA and Merrill had no duty to update shareholders as to their financial results on an intra-quarterly basis, since quarterly reports are the mechanism for updating company finances and SEC regulations do not require intra-quarter financial statements.

See, e.g., Higginbotham v. Baxter Int’l Inc.,

495 F.3d 753, 760 (7th Cir.2007) (Easterbrook, J.) (“The securities laws create a system of periodic rather than continual disclo

*304

sures.”);

In re Burlington Coat Factory Sec. Litig.,

114 F.3d 1410, 1432 (3d Cir.1997) (Alito, J.) (revisions to earnings forecast do not create a “continuous duty to update the public with either forecasts or hard information that would in anyway change a reasonable investor’s perception”). Yet these same rulings recognize that intra-quarter updates may be required, if intervening events trigger a duty to disclose.

Higginbotham,

495 F.3d at 760 (“Silence is not ‘fraud’

without a duty to disclose.”)

(emphasis added);

In re Burlington Coat Factory,

114 F.3d at 1432 (“[U]pdating might be required if a prior disclosure [had] become materially misleading in light of subsequent events.”) (alteration in original; quotation marks omitted).

The Joint Proxy and the 10-Q filings for the third quarter of 2008 minced no words about the challenging economic climate and the likelihood that Merrill would continue to incur losses in the near and medium term. The Joint Proxy, which was filed on November 3, 2008, stated that Merrill had suffered significant recent losses and that economic turmoil influenced its decision to pursue the transaction. Under the “Recent Developments” heading, the Joint Proxy states that “[o]n October 16, 2008, Merrill Lynch announced a net loss from continuing operations for the third quarter of $5.1 billion, or $5.56 per diluted share, compared to a net loss from continuing operations of $2.4 billion, or $2.99 per diluted share, in the third quarter of 2007.” (Joint Proxy at 36.) The Joint Proxy stated that in deciding to proceed with the transaction, Merrill considered “the current and prospective environment in which Merrill Lynch operates, which reflects challenging and uncertain investment banking industry conditions and risks that the Merrill Lynch board of directors

expected to persist,

including: the volatile valuations and illiquidity of certain financial assets and exposures ... [and] generally uncertain national and international economic conditions!.]” (Joint Proxy at 52 (emphasis added).)

Defendants also point to the 10-Q filings of Merrill and Bank of America for the third quarter of 2008, which were filed on November 5 and 6, 2008, respectively. Merrill’s Form 10-Q stated that the “adverse market environment intensified towards the end of the quarter, particularly in September, and was characterized by increased illiquidity in the credit markets, wider credit spreads, lower business and consumer confidence, and concerns about corporate earnings and the solvency of many financial institutions.” (Merrill 3Q08 10Q at 82.) “Turbulent market conditions in the short and medium-term will continue to have an adverse impact on our core

*305

business.” (Merrill 3Q08 10Q at 83.) Separately, BofA’s Form 10-Q filing of November 6, 2008, stated that “resulting economic pressure on consumers and lack of confidence in the financial markets has adversely affected our business, financial condition and results of operations. We do not expect that the difficult conditions in the financial markets are likely to improve in the near future. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry.” (BofA 3Q08 10Q at 175.) BofA characterized the “[c]urrent levels of market volatility” as “unprecedented.” (BofA 3Q08 10Q at 176.) “If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.” (BofA 3Q08 10Q at 176.) Investors were placed on notice that Merrill faced similar perils: “Merrill Lynch and its business are subject to many of the same difficulties resulting from the market turmoil and tightening of credit as we are.... Merrill Lynch’s ability to mitigate its risk by selling or hedging its exposure is also limited by the market environment, and its future results may continue to be materially impacted by the valuation adjustments applied to these positions.” (BofA 3Q08 10Q at 176-77.)

BofA and Merrill explicitly discussed the difficulties posed by the “unprecedented” economic climate and the likelihood that such difficulties would persist for the near future. Specifically, both BofA and Merrill acknowledged the risk that Merrill faced risks from economic “turmoil” and was suffering from “[tjurbulent market conditions” that “will continue to have an adverse impact on our core business” in the “short and medium[ ] term.” (Merrill 3Q08 10Q at 83.)

It is also the case that, accepting the truth of the Securities Complaint’s nonconclusory allegations, at the time the Joint Proxy was filed on November 3, 2008, the defendants were aware that Merrill already had incurred approximately $7 billion in losses in October 2008. This was the highest monthly loss in the company’s history. (Sec. Compl. ¶ 184.) While the Joint Proxy and the third quarter 10-Q statements indeed painted a grim portrait of Merrill’s near-term and medium-term prospects, when the Securities Complaint’s allegations are accepted as true, at the time the Joint Proxy issued, the defendants were aware that Merrill had suffered historically large losses in October. By the time the Joint Proxy issued, the stormy forecast for the fourth quarter was not merely a projection: the storm had arrived. These losses were a known fact to company insiders, yet were not disclosed to BofA’s shareholders.

The purpose of Rule 14a-9 is to “ensure disclosures by corporate management in order to enable the shareholders to make an informed choice.”

TSC Indus.,

426 U.S. at 448 , 96 S.Ct. 2126 . Rule 14a-9 makes it unlawful to issue a proxy statement “which omits to state any material fact necessary in order to make the statement therein not false or misleading.” 17 C.F.R. § 240 .14a-9(a). The rule was promulgated “with the goal of preserving for all shareholders who are entitled to vote, not just for those who sponsor proposals, the right to make decisions based on information that is not false or misleading.”

United Paperworkers,

985 F.2d at 1198 ;

accord MONY Group, Inc. v. Highfields Capital Mgt, L.P.,

368 F.3d 138 (2d Cir.2004) (“The SEC rules promulgated under Section 14(a) are intended to level somewhat the playing field for proxy contes

*306

tants and to force disclosures that promote informed shareholder voting.”).

Courts have held Section 14(a) claims to be viable when proxy issuers failed to adequately incorporate filings that set forth environmental liabilities,

United Paperworkers,

985 F.2d at 1200-01 , omitted discussion of directors’ potentially conflicting interests,

Mills,

396 U.S. at 378 , 90 S.Ct. 616 , and omitted disclosure of adverse court judgments, significant company loans, and the value of significant real estate holdings,

Wilson ,

855 F.2d at 991— 94. In

Wilson ,

the Second Circuit also held that plaintiffs had asserted a viable Section 14(a) claim when the proxy statement disclosed a subsidiary’s previous annual loss of $2.5 million but failed to disclose that in the first six months of the new fiscal year, that same company had already lost $2.1 million.

Id.

at 994-95 .

The defendants’ argument that the negative forecast in the Form 10-Q filings and the Joint Proxy placed shareholders on adequate notice of Merrill’s perilous financial condition is inextricably intertwined with the issue of materiality. Defendants’ theory invites the Court to hold that the more general — though indisputably grim— statements concerning the economic climate’s effect on Merrill were sufficient to render immaterial the non-disclosure of Merrill’s actual losses. A fact is material “if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.”

TSC Indus.,

426 U.S. at 449 , 96 S.Ct. 2126 . The “total mix” of information goes beyond a proxy’s four corners and includes information “reasonably available to the shareholders,” including media reports and documents in the public domain.

United Paperworkers,

985 F.2d at 1198-99 .

Here, accepting the truth of the Securities Complaint’s allegations, Merrill’s undisclosed losses of October 2008 were the largest monthly losses in the company’s history. (Sec. Compl. ¶ 184.) The defendants were aware of the losses prior to the Joint Proxy’s filing. (Sec. Compl. ¶¶ 93-95, 97.) The Court cannot conclude, as a matter of law at the Rule 12(b)(6) stage, that the broad warnings of the Joint Proxy and the two 10-Q filings “enable[d] the shareholders to make an informed choice.”

TSC Indus.,

426 U.S. at 448 , 96 S.Ct. 2126 .

This is not, as the defendants assert, tantamount to an obligation that a company issue continuous updates of its financial condition.

It is instead a recognition that Section 14(a) and Rule 14a-9 apply even in a moment of significant “turbulence” and “turmoil.” The Joint Proxy’s general warnings came to fruition, and the Securities Complaint alleges in a non-conclusory manner that the losses were well known to BofA’s executives and, in November, amounted to $1 billion per week. As presently alleged, the Securities Complaint plausibly asserts that both the scope and the timing of the losses raise “a substantial likelihood that a reasonable shareholder would consider [them] important in deciding how to vote.”

TSC Indus.,

426 U.S. at 449 , 96 S.Ct. 2126 .

The defendants’ motions to dismiss Securities Plaintiffs’ '34 Act claims, to the extent that they are premised on a failure to disclose Merrill’s losses of October and November 2008, is denied. However, as will be discussed, the Securities Complaint fails to raise a cogent and compelling infer

*307

ence of scienter as to the non-disclosure of these losses.

For Substantially the Same Reasons, the Derivative Complaint Adequately Alleges That Section 11(a) and Rule lka-9 Required the Disclosure of Merrill’s Fourth Quarter Losses.

The Derivative Complaint contains, in essence, the same allegations regarding he scope of Merrill’s losses during the fourth quarter of 2008. (Deriv. Compl. ¶¶ 232(f), 233(a)

(e).) The Second Circuit “has construed [Rule 14a-9] to encompass the omission of significant facts subsequent to the original dissemination of the proxy statement.”

S.E.C. v. Parklane Hosiery Co., Inc.,

558 F.2d 1083 , 1089 n. 3 (2d Cir.1977) (citing

Gerstle,

478 F.2d at 1297 n. 15).

The Derivative Plaintiffs have alleged in a non-conclusory manner that Merrill incurred a $4.4 billion loss in October, prior to the distribution of the Joint Proxy on November 5, 2008. (Deriv. Compl. ¶ 168.) Likewise, when BofA filed its two proxy supplements, on November 21 and November 28, 2008, Merrill already had incurred increased losses during November.

(Id.)

The Derivative Complaint alleges sufficient facts to foreclose the conclusion that, at this stage, Merrill’s fourth quarter losses were immaterial as a matter of law.

Claims in the Securities and Derivative Complaints Directed to the Merger Agreement’s MAC Clause Are Dismissed.

Securities Complaint Fails to Plausibly Allege That the Defendants Violated Section 10(b) and Rule 10b-5 by Failing to Disclose Developments Related to the MAC.

The Securities Plaintiffs assert that, to the extent that the Merger Agreement warranted that no material adverse effects would arise between the execution of the Merger Agreement and the closing of the transaction, the MAC itself triggered a disclosure duty when negative events unfolded prior to the shareholder vote. Separately, they allege that internal discussions within BofA about invoking the MAC and terminating the transaction were of sufficient importance to trigger BofA’s obligation to disclose the underlying sources of concern to shareholders. These allegations fail to state a plausible claim that the defendants violated Section 10(b) and Rule 10b-5 in their conduct relating to the MAC.

I begin by reviewing the relevant terms of the MAC. According to the Securities Complaint, the Merger Agreement warranted that Merrill had undergone no material adverse effect as of the date of the Merger Agreement, and that this would remain true until the close of the transaction. (Sec. Compl. ¶ 211.) The MAC provides that a “material adverse effect” arises when there is “a material adverse effect on (i) the financial condition, results of operations or business ... taken as whole.... ” (Joint Proxy at A-13.) The MAC then sets forth numerous circumstances that “shall not be deemed” to constitute a material adverse effect. (Joint Proxy at A-13.) These carve-outs from the MAC vary in breadth and substance, and include matters as diverse as changes in accounting standards, changes in statute or regulation, acts of terrorism, “changes in global, national, or regional political conditions ... or

general business, economic or market conditions.”

the failure to meet earnings projections, and changes in stock price. (Joint Proxy at A-13 (emphasis added).)

At Item 1.02 of Form 8-K, Instruction 1, the SEC has promulgated a rule that “[n]o disclosure is required ... during negotiations or discussions regarding a termination of a material definitive agreement

*308

unless and until the agreement has been terminated.” The SEC’s regulation does not entirely dispose of the plaintiffs’ MAC-related disclosure claim, however. The plaintiffs do not assert that the '34 Act was violated because the defendants failed to invoke the MAC or disclose internal deliberations on whether to invoke the MAC. Rather, they contend that the Merger Agreement warranted against the existence of a material adverse effect prior to the closing. In the plaintiffs’ view, the underlying fourth quarter losses at Merrill were sufficient to require disclosure of a material adverse effect, as warranted against by the MAC. (Sec. Compl. ¶ 102.)

The Securities Complaint fails to connect its allegations of a material adverse effect to the actual language of the MAC. The Securities Complaint does not explain how the defendants’ action or inaction contradicted any specific term of the MAC. It merely cites the existence of a MAC, alleges that BofA considered its invocation, and concludes,

ipse dixit,

that a material adverse effect existed and therefore further disclosure of Merrill’s underlying financial conditions was required. Of particular note is that the MAC excludes as an adverse material effect changes in

“general business, economic or market conditions

.... ” (Joint Proxy at A-13.) In failing to engage the text of the MAC, the Securities Complaint falls short of “demonstrating] with specificity why and how” defendants fraudulently failed to comply with the MAC’s warranty against a material adverse effect.

Rombach,

355 F.3d at 174 ;

accord ATSI,

493 F.3d at 99 (a securities fraud complaint must explain why statements are fraudulent in nonconclusory allegations supported by fact).

The Securities Plaintiffs’ general averment concerning the MAC does not allege fraud with particularity, and their MAC-based claim is dismissed.

For Substantially the Same Reasons, the Derivative Plaintiffs’ Section lU(a>) Claims Arising from the Terms of the MAC Are Dismissed.

For the reasons stated above, the Derivative Plaintiffs’ claims based on the statement in the Joint Proxy that “[e]ach of Bank of America and Merrill Lynch has made representations and warranties to the other regarding, among other things ... the absence of material adverse changes,” are dismissed. (Joint Proxy at 82; Deriv. Compl. ¶¶ 233(b) & (c).) So, too, are the Derivative Plaintiffs’ claims based on the sections 7.2(a) and 7.3(a) of the Merger Agreement, which set as a condition precedent to the merger that the representations and warranties of BofA and Merrill would be true as of the “Effective Time,” which the Merger Agreement identified as the date when the merger became effective. (Joint Proxy at A-l, A-40-41.)

The allegations that certain defendants discussed invoking the MAC do not save plaintiffs’ claim. Internal discussions about invoking a MAC clause, and seeking legal advice regarding the same, do not, in themselves, render misleading a statement that there has not been and will not be a material adverse effect. As stated above, the SEC does not require disclosure of negotiations and discussion regarding termination unless the agreement actually has been terminated. Item 1.02 of Form 8-K, Instruction No. 1. If the mere consideration of invoking a MAC clause required disclosure of such consideration, there would be a powerful disincentive to entertain the discussion. In some cases, this would work to the detriment of the company.

The Derivative Plaintiffs’ claim directed to the MAC is dismissed.

*309

Derivative Plaintiffs’ Allegations Concerning Non-Disclosure of the Decision to Invoke the MAC Clause Fail to State a Claim under Section 11(a) or Rule 110-9.

The Derivative Plaintiffs allege that the Joint Proxy should have been updated to reflect that the BofA Derivative Defendants had determined that it was in BofA’s best interest to invoke the MAC clause, but they declined to do so solely due to Secretary Paulson’s alleged threat to replace them. (Deriv. Compl. ¶ 233(c)(c).) Instead of alleging facts showing that BofA Officers or Directors had concluded a material adverse effect had occurred or that they had decided to invoke the MAC, plaintiffs make the conclusory allegation that “prior to the Shareholder Vote, Defendants Lewis, Price, Curl and the BofA Board were well aware that the significant deterioration in Merrill’s asset values, and its ballooning losses, justified invoking the MAC clause, yet deceptively and in bad faith took pains to conceal these facts.... ” (Deriv. Compl. ¶ 181.)

The earliest date by which the Derivative Plaintiffs allege that a defendant learned that BofA could invoke the MAC clause is December 14, 2008, which postdates the shareholder vote. Plaintiffs allege that on that date, “the Wachtell law firm opined that grounds existed to invoke [the MAC] clause to terminate the Merger.” (Deriv. Compl. ¶ 183.) This was over one week after the shareholder vote on December 5, 2008. The remaining allegations regarding the decision to invoke the MAC clause, and the reversal of that decision, relate to events that occurred after December 14, 2008. (Deriv. Compl. ¶¶ 184-191.)

Similarly, plaintiffs allege that the Joint Proxy should have disclosed that “management had received advice from” internal counsel that Merrill’s losses justified invoking the MAC clause. (Deriv. Compl. ¶ 232(e).) However, plaintiffs have not alleged that internal BofA counsel opined that BofA could invoke the MAC clause before the shareholder vote. The particular allegations the Derivative Plaintiffs do make state only that internal counsel both gave and received advice regarding Merrill’s losses (Deriv. Compl. ¶¶ 167, 173, 182), but plaintiffs do not allege what that advice was. The Derivative Plaintiffs’ Section 14(a) claims are dismissed to the extent they are predicated on these statements.

Claims Directed to the Adequacy of BofA’s Due Diligence Are Dismissed.

The Securities Complaint Fails to Plausibly Allege That the Defendants’ Representations Concerning Due Diligence Violated Section 10(b) and Rule 10b-5.

The Securities Plaintiffs allege that BofA’s due diligence was inadequate, and that defendants unlawfully misstated the extent of their investigation of Merrill and failed to disclose its inadequacy. According to the plaintiffs, the defendants’ purported failings were material. (Sec. Compl. ¶ 184.) I conclude that the Securities Complaint fails to plausibly allege that the opinions expressed concerning the adequacy of due diligence were falsely held by defendants.

According to the Securities Complaint, on September 15, 2008, Price said in an investor call that the due diligence performed by BofA and its financial advisor had been “extensive.” (Sec. Compl. ¶ 179.) Price stated that BofA was aware of Merrill’s operations from their years as competitors, and had also “sent in a large team to review areas such as asset valuations, trading positions, and the like.” (Sec.

*310

Compl. ¶ 179.) He stated that BofA’s financial advisor was familiar with Merrill’s condition because it had reviewed Merrill for other potential transactions. (Sec. Compl. ¶ 179.) Lewis stated in a press conference that the company’s financial ad-visors “had done quite an amount of due diligence on Merrill Lynch fairly recently, and it was very, very extensive. They had looked at the marks very comprehensively .... So that was one of the key ingredients to being able to do this as quickly as we did.” (Sec. Compl. ¶ 180.) As a result of the due diligence, Lewis stated, he believed that Merrill had “a much lower risk profile” than before. (Sec. Compl. ¶ 180.)

The Securities Complaint asserts that BofA misrepresented the scope and adequacy of its diligence efforts. It alleges that BofA had not comprehensively analyzed Merrill’s finances, and had no basis to make any representation about Merrill’s risk profile. (Sec. Compl. ¶ 182.) It also cites an analysis by Federal Reserve officials stating that BofA’s statements implied “substantial deficiencies in the due diligence carried out in advance of and subsequent to the acquisition.” (Sec. Compl. ¶ 182.) In December 2008, Bernanke allegedly told Lewis that if the transaction were terminated, it would “reveal the falsity of his claims regarding ‘adequate due diligence.’ ” (Sec. Compl. ¶ 183.) Mac Alfriend, a vice president at the Fed, wrote to other senior Fed officials stating that Lewis “is worried about stockholder lawsuits; knows they did not do a good job of due diligence and the issues facing the company are finally hitting home .... ” (Sec. Compl. ¶ 183.)

The defendants argue that their representations made as to the adequacy of due diligence were appropriately qualified, and that investors therefore could not be misled as to the scope of BofA’s due diligence. As they note, in the investor call, Price was questioned by several analysts about the adequacy of due diligence “given the extremely abbreviated time frame” in which the transaction was negotiated. (Sec. Compl. ¶ 179.) Defendants also rely on BofA’s statements concerning its past transactions with Merrill and its financial advisor’s past experiences with Merrill, as well as Lewis’s statements that Merrill had reduced its risk, as opposed to stating that it was eliminated altogether. (Sec. Compl. ¶¶ 179-80.)

Defendants also contend that BofA’s representations concerning its due diligence amounted to non-actionable statements of opinion and broad generalizations that could not be a basis for shareholder reliance. They rely on

ECA, Local 134,

553 F.3d at 205-06 , which held that “generalizations” regarding “business practices” do not “amount to a guarantee” to shareholders. But there is a difference between enthusiastic statements amounting to general puffery and opinion-based statements that are anchored in “misrepresentations of existing facts.”

Novak,

216 F.3d at 315 . “The sine qua non of a securities fraud claim based on false opinion is that defendants deliberately misrepresented a truly held opinion.”

Podany v. Robertson Stephens, Inc.,

318 F.Supp.2d 146, 153-54 (S.D.N.Y.2004) (Lynch, J.). These statements fall into the category of fact-based expressions of opinion rather than enthusiastic, vague, forward-looking puffery.

Although there is some disagreement among the district courts in this Circuit as to whether recklessness can satisfy the subjective falsity requirement, the prevailing conclusion is that a plaintiff must allege that the defendant did not actually believe the stated opinion.

The First and

*311

Ninth Circuits have also held that a plaintiff must allege that the defendant did not sincerely believe the stated opinion.

See Rubke v. Capitol Bancorp Ltd,.,

551 F.3d 1156, 1162 (9th Cir.2009);

In re Credit Suisse First Boston Corp.,

431 F.3d 36, 47 (1st Cir.2005),

overruled on other grounds by Tellabs,

551 U.S. 308 , 127 S.Ct. 2499 . This comports with the Supreme Court’s view in

Virginia Bankshares

that statements of belief are statements of fact in the sense that they convey that the speaker “do[es] act for the reasons given or hold the belief stated,” and that such statements may be attacked by “circumstantial evidence bearing on the facts that would reasonably underlie the reasons claimed and the honesty of any statement” regarding those reasons. 501 U.S. at 1092-93 , 111 S.Ct. 2749 .

“While in a misstatement of fact case the falsity and scienter requirements present separate inquiries, in false statement of opinion cases ... the falsity and scienter requirements are essentially identical.”

Podany,

318 F.Supp.2d at 154 . This is because the subjective falsity requirement necessarily requires an inquiry into the defendant’s state of mind. In

Novak ,

opinion-based statements that certain inventory-related issues were “in good shape” or “under control” were deemed actionable when defendants were alleged to have known that the opposite was true. 216 F.3d at 315 . As Judge Lynch later explained in

Podany ,

“[i]t is not sufficient to allege ... that it would have been possible to reach a different opinion than that reached by defendant based on information available to defendant at the time, or even that the defendant’s opinion was unreasonable.” 318 F.Supp.2d at 154 . Judge Lynch also explained that to successfully plead that an opinion was fraudulently stated, it is tantamount to successfully pleading scienter as to those same statements, “since the statement (unlike a statement of fact) cannot be false at all unless the speaker is knowingly misstating his truly held opinion.”

Id.

The reasoning of Judge Lynch and others is persuasive. Thus, the PSLRA’s requirement that a plaintiff must plead “with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind,” applies to the Securities Plaintiffs’ allegations concerning the adequacy of due diligence. 15 U.S.C. § 78u-4(b)(2).

*312

The Securities Complaint fails to allege with particularity that the statements by Lewis and Price were knowingly false at the time that they were uttered. Accepting the truth of the Securities Complaint, Lewis and Price based their statements concerning the adequacy of their investigation on BofA’s extensive dealings with Merrill, and its financial advisor’s own long history with Merrill. (Sec. Compl. ¶¶ 179-80.) Their confidence was based on historic interactions, and not just an investigation undertaken over the weekend of the transaction’s negotiation. Moreover, Lewis’s statement that Merrill had reduced its risk was not equivalent to stating that Merrill had altogether eliminated its risk. (Sec. Compl. ¶ 180.) The Securities Complaint does not plausibly allege that these opinions were falsely held at the time that they were expressed.

It is true that, months later, Fed regulators and Lewis questioned whether BofA performed adequate diligence of Merrill’s risk portfolio. (Sec. Compl. ¶¶ 182-83.) Such retrospective critiques do not amount to an allegation that Lewis and Price knew their statements were false at the time they were uttered. Because the Securities Complaint does not plausibly allege facts that Price and Lewis falsely stated their opinions about the adequacy of due diligence, defendants’ motion to dismiss is granted as to those statements,

Similarly, the Derivative Plaintiffs Have Not Adequately Alleged That Statements in the Joint Proxy Regarding Due Diligence Violated Section H(a) and Rule lUa-9.

The Derivative Plaintiffs allege that the Joint Proxy misrepresented the level of due diligence that was performed prior to the BofA Directors’ decision to approve the merger. They quote two portions of the Joint Proxy that address the due diligence process. According to the Derivative Complaint, BofA “senior management” and the Financial Advisors “presented the Bank of America board of directors with the findings of their due diligence investigation of Merrill Lynch and additional information, including financial information regarding the two companies and the transaction....” (Deriv. Compl. ¶ 107.) The Derivative Plaintiffs also allege that the Joint Proxy “states that the due diligence investigation the BofA Defendants made of Merrill began no earlier than the late afternoon of Saturday, September 13, 2008, and was concluded by ‘[ejarly in the morning of Sunday, September 14, 2008,’ when ‘Messrs. Thain and Lewis met in New York City [and] discussed the results of the due diligence investigations conducted by their companies’ respective representatives.’ ” (Deriv. Compl. ¶ 111 (alteration in original).)

The Derivative Plaintiffs have not adequately alleged that those statements were false or misleading. In fact, they repeatedly emphasize throughout the Derivative Complaint the truth of the latter statement: that the due diligence process lasted for 10 hours. (Deriv. Compl. ¶¶ 3, 11, 102, 105, 111, 314(a).) The Derivative Complaint’s allegations regarding the due diligence process essentially assert that it was “entirely perfunctory,” and insufficient. (Deriv. Compl. ¶¶3, 10, 11, 104, 107, 111, 115, 116, 118, 245, 248, 268, 300(d), 314(a).) Merely alleging that due diligence was flawed, however, does not state a claim under Section 14(a) or Rule 14a-9, which require a misleading proxy statement.

See Maldonado v. Flynn,

597 F.2d 789, 796 (2d Cir.1979) (stating that efforts “to dress up” breach of fiduciary duty claims as a Section 14(a) “suit of clothes have consistently been rejected”);

Koppel,

167 F.3d at 133 (“We have long recognized that no general cause of action

*313

lies under § 14(a) to remedy a simple breach of fiduciary duty.”). The Derivative Plaintiffs’ Section 14(a) claim is dismissed to the extent it is based on the statements regarding the due diligence performed prior to the board’s decision to approve the merger.

Securities Complaint and the Derivar tive Complaint Both Fail to Plausibly Allege That Defendants Ran Afoul of the 'Sf Act’s Duty to Update.

Defendants in the Securities Complaint Had No General Duty to Update Certain Statements in Light of the October and November Losses.

According to the Securities Plaintiffs, some of the defendants’ representations triggered a duty to update past statements. For the reasons explained below, the duty did not apply.

“A duty to update may exist when a statement, reasonable at the time it is made, becomes misleading because of a subsequent event.”

In re IBM Corp. Sec. Litig.,

163 F.3d 102, 110 (2d Cir.1998). There is no duty to update opinions, non-material remarks, “vague statements of optimism,” or statements that were not forward-looking with a “factual representation that remains ‘alive’ in the minds of investors as a continuing representation. ...”

Id.

“When objectively verifiable factors cause a significant change in a party’s attitude toward a merger — a ‘sharp break from ... prior public positions,’ the securities laws may require that previously disclosed intentions be corrected.”

In re Gulf Oil/Cities Serv. Tender Offer Litig.,

725 F.Supp. 712 , 748 (S.D.N.Y.1989) (applying Section 14(e) of the '34 Act) (quoting

Kamerman v. Steinberg,

123 F.R.D. 66, 71 (S.D.N.Y.1988)).

Among the statements that the Securities Plaintiffs allege should have been updated were descriptions of the acquisition as a “major grand slam home run,” the “strategic opportunity of a lifetime,” and the prediction that it would “creat[e] more value for shareholders.” (Sec. Compl. ¶ 191.) These vague statements of optimism did not require updating.

Also, the characterization that Merrill had “dramatically” lowered its risk profile did not require updating. (Sec. Compl. ¶ 80.) Plaintiffs do not dispute that Merrill had, in fact, lowered its risk profile. This was a forward-looking statement that did not trigger a duty to update.

In re IBM,

163 F.3d at 110 . In addition, BofA’s representations that it had a “strong capital position” and that the transaction would result in a “strong capital position, funding capabilities and liquidity” from the combined company are vague statements of optimism that do not require updating. (Sec. Compl. ¶¶ 212-13.)

The Securities Plaintiffs also point to an allegedly misleading statement by Price, who, in a conference call, asserted that approximately $10 billion earned in BofA’s secondary offering “covered our anticipated needs from a Merrill standpoint.” (Sec. Compl. ¶ 199.) Plaintiffs contend that this statement later required updating because, in order to absorb Merrill’s losses, BofA required a capital injection from the federal government. The Securities Complaint does not, however, allege a connection between any asserted shortcomings in the

*314

Secondary Offering and the losses of the fourth quarter of 2008. Even assuming a connection between the Secondary Offering’s proceeds and the need to “cover[]” fourth quarter losses — an interpretation of the remarks that is not supported by the text of this isolated quote — Price’s statement was qualified to the extent that BofA’s “needs” were described as “anticipated.” (Sec. Compl. ¶ 199.)

The Securities Complaint fails to state a claim under Section 10(b) and Rule 10b-5 for failure to satisfy a duty to update.

Derivative Plaintiffs’ Section H(a) and Rule U-a-9 Claims Based on Statements Regarding the Future Capital Position of BofA and Merrill Are Dismissed.

The statements that BofA had a “strong capital position, funding capabilities and liquidity,” and that the combined company would likewise have a “strong capital position, funding capabilities and liquidity” (Deriv. Compl. ¶ 233(c)), are the type of “vague statements of optimism or expressions of opinion” for which there was no duty to update.

In re IBM,

163 F.3d at 110 . Therefore, the Derivative Plaintiffs Section 14(a) and Rule 14a-9 claims based on these statements are dismissed.

Motions to Dismiss the Securities Plaintiffs’ Additional Section 10(b) and Rule 10b-5 Claims Are Granted in Part and Denied in Part.

The Securities Plaintiffs assert claims that implicate statements and events that occurred following the shareholder vote. The defendants contend that these statements are not actionable under Section 10(b) and Rule 10b-5. With the exception of the defendants’ alleged non-disclosure of federal financial assistance in December 2008, which will be further discussed, the motion to dismiss for failure to allege fraudulent conduct is granted.

Statements in BofA’s Press Release of January 1, 2009 Are Non-Actionable.

Plaintiffs allege that a January 1, 2009 press release issued by BofA contains materially false and misleading statements, to the extent it states that the acquisition created “a premier financial services franchise with significantly enhanced wealth management, investment banking and international capabilities.” (Sec. Compl. ¶ 229.) In an accompanying press release, defendant Lewis stated that the combined firm was “uniquely positioned to win market share” with its “significantly enhanced” capabilities. (Sec. Compl. ¶ 229.) Plaintiffs contend that the statement was materially false and misleading because it omitted discussion of “critical developments” that allegedly threatened the transaction. (Sec. Compl. ¶ 229.)

Such remarks are non-actionable puffery that are too vague to permit reasonable investor reliance.

See, e.g., ECA, Local 134,

553 F.3d at 205-06 (statement touting “highly disciplined” risk management processes was non-actionable);

Lasker v. New York State Elec. & Gas Corp., 85

F.3d 55, 59 (2d Cir.1996) (predictions that company “business strategies [would] lead to continued prosperity,” among other similar statements, were non-actionable puffery). As a result, they are not actionable statements under Section 10(b) and Rule 10b-5, and the plaintiffs’ claims are dismissed,

Motion to Dismiss the Section 10(b) and Rule 10b-5 Claims Is Denied As to BofA’s Allegedly Undisclosed Arrangement to Receive Federal Funds.

The Securities Complaint alleges that Lewis received a firm commitment from officials at Treasury and the Fed to provide BofA with extensive capital in order to consummate the acquisition. Specifically, the Securities Complaint alleges

*315

that in exchange for BofA’s agreement to proceed with the transaction, the Treasury Department and the Federal Reserve provided a $20 billion capital infusion to BofA in exchange for a sale of preferred stock, and also agreed to guarantee losses of $118 billion in risky assets, the large majority of which came from Merrill. (Sec. Compl. ¶ 132.) It further alleges that these commitments were material and undisclosed. (Sec. Compl. ¶ 134.)

The BofA defendants argue that they had no duty to disclose their communications with regulators, “no matter how material [they] may be.” (BofA Sec. Mem. at 53.) They cite to the SEC rules of Form 8-K, which require disclosure of “material definitive agreements] not made in the ordinary course of business.” Form 8-K, at Item 1.01(a). According to the defendants, the Securities Complaint does not allege a definitive agreement between BofA and federal regulators that triggered a disclosure obligation.

According to the minutes of a board of directors meeting on December 22, 2008, Lewis stated that “the Treasury and Fed have confirmed that they will provide assistance to the Corporation to restore capital and to protect the Corporation against the adverse impact of certain Merrill Lynch assets,” that “the Corporation can rely on the Fed and Treasury to complete and deliver the promised support by January 20, 2009, the date scheduled for the release of earnings by the Corporation,” and that “the incoming economic team of the new administration are informed of the commitment to the Corporation by the Fed and Treasury and that all concur with the commitment of the combined federal regulators (‘federal regulators’) to the Corporation.” (Sec. Compl. ¶ 132.) The minutes summarize Lewis’s remarks stating that management’s recommendation to proceed with the acquisition was based on “the verbal commitment of the Fed and Treasury to have a transaction evidencing the Fed and Treasury’s committed assistance in existence no later than January 20, 2009,” as well as “the assurances which have been made by the Fed and Treasury and clarification that funds under the TARP program are available for distribution to the Corporation to fulfill the commitment of the Treasury and Fed.” (Sec. Compl. ¶ 133.)

According to the Securities Complaint, Lewis told the board of directors that there could be no written agreement with the federal government because such an agreement would be publicly disclosed. In an e-mail sent to the board of directors on December 22, 2008, Lewis stated: “I just talked with Hank Paulson. He said that there was no way the Federal Reserve and the Treasury could send us a letter of any substance without public disclosure, which, of course, we do not want.” (Sec. Compl. ¶ 134.) According to board meeting minutes, on December 30, 2008, Lewis informed the board of directors that “management has obtained detailed oral assurances from the federal regulators with regard to their commitment and has documented those assurances with e-mails and detailed notes of management’s conversations with the federal regulators.” (Sec. Compl. ¶ 135.) At the same meeting, according to the minutes, Lewis “discussed in detail several of the conversations between Mr. Price and Mr. Warsh establishing essential elements of the commitment of the federal regulators including ... the commitment of federal regulators to deliver assistance in the form of capital and asset production to the Corporation.” (Sec. Compl. ¶ 135.) Lewis said that BofA “had clearly explained to the federal regulators the terms and conditions” required to complete the transaction, and received “strong assurances from all relevant federal regulators and policy

*316

makers” that BofA would receive “adequate and appropriate assets to neutralize the impact of the financial condition of the Corporation resulting from the Corporation’s acquisition of Merrill Lynch on January 1, 2009.” (Sec. Compl. ¶ 135.) The minutes of the December 30 meeting further state, “Mr. Lewis explained that written assurances would not be received before January 1, 2009, because any written assurances would require formal action by the Fed and Treasury, which formal action would require public disclosure.” (See. Compl. ¶ 136.)

These detailed, non-conclusory allegations plausibly allege that BofA received concrete assurances from officials at the Treasury and the Federal Reserve that BofA woul

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.