Legal Briefing: Bank of America Admits to 'Mistakenly' Hiding Debt

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Editor's Note: The original version of the post below mistakenly referred to Citigroup rather than Bank of America. A corrected version follows. DailyFinance regrets the error.

Bank of America
Admits Fudging Its Books

Corporate Counsel reports that Bank of America (BAC) temporarily took as much $10.7 billion in debt off its books just in time to make its quarterly filings by "mistakenly" classifying a kind of borrowing as a sale. A May 13 letter that BofA sent to the Securities and Exchange Commission admitted the faulting accounting occurred four times: March 31, 2007 ($4.5 billion in debt hidden), Dec. 31, 2007 ($1.8 billion), Sept. 30, 2008 ($10.7 billion) and March 31, 2009 ($573 million). In making the "mistaken" classification, BofA was not using the infamous Lehman Brothers Repo 105. Instead, BofA's move is called a "dollar roll."

The bank flatly states that its use of the dollar roll "does not stem from any intentional misstatement of the Corporation's consolidated financial statements and was not related to any fraud or deliberate error" and denies the result was material, pointing out that the only impact would be on the Tier 1 Leverage Ratio, and even then it would only move it from 5.1% to 5%, still above the minimum 4%. Lehman's Repo 105 use, by contrast, was material.

Still, it would be interesting to understand why BofA did what it did, and what the SEC thinks of it. In any case, it's just one more reason to be cautious when reading quarterly statements.

Bondholder Suit Against Citigroup Goes Forward

Investors who bought Citigroup (C) bonds on the secondary market (rather than when issued by Citi) can sue Citi for securities fraud for failing to disclose it had $66 billion in collateralized debt obligations backed by subprime mortgages, ruled U.S. District Court judge Sidney H. Stein. Judge Stein also allowed plaintiffs to pursue a claim that Citi's statements that it was "well capitalized" and that its financial statements complied with Generally Accepted Accounting Principals were false. (I wonder if the May 13 letter to the SEC will help plaintiffs in that regard.)

Goldman to Delay Answering the SEC Again?

Reuters reports that Goldman (GS) may ask for a second extension of time to answer the SEC's fraud charges. What gives? Are settlement talks progressing? Are the draft answers to date just not that strong? Is Goldman not prioritizing getting this done? The first delay request was granted at least in part because "the parties have not previously sought any extension of time in this matter." I wonder how many delays Goldman would be allowed.

And in the Business of Law...

Can two law students do what the legal education system has failed to do -- namely, give prospective students the information to make smart decisions about enrolling? Probably not, since they lack subpoena power, but at least they're trying. Two students have formed a nonprofit and have asked law schools to submit relatively detailed yet basic information about the types of jobs, and salaries, that the law schools' graduates get upon graduation. The ABA Journal reports that the results will be posted on a website. I'm not sure there will be any results, though, given how dismal the schools' true answers are likely to be. If any schools are brave enough to answer fully, the timing couldn't be better; the AmLaw Daily reports law school applications are on the rise.
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