The Commission found that in March 1997, BankAmerica entered into a business alliance with D.E. Shaw that engaged in securities and derivatives trading and provided a means by which BankAmerica could offer derivatives products to its customers. BankAmerica was entitled to receive, among other things, certain of the trading profits of the alliance. The alliance was documented as a loan, and BankAmerica treated it as a loan for financial reporting and accounting purposes in certain filings made with the Commission during 1997 and 1998. The Commission found that treating the alliance as a loan was improper under Generally Accepted Accounting Principles. The alliance had substantially the risk characteristics of an equity investment rather than a loan. The Commission found that BankAmerica should have accounted for the alliance using the equity method of accounting, and recorded the alliance as an investment.
The activities of the alliance were financed by BankAmerica, and subjected BankAmerica to market risks carrying the potential for substantial losses. The alliance used a significant amount of leverage, which magnified these market risks and the consequent potential for losses. In August 1998, the Russian Federation defaulted on certain bonds and devalued its currency, which resulted in worldwide turmoil in the financial markets. By no later than mid-September 1998, the alliance had suffered substantial losses in various of its securities and derivatives positions as a result of this turmoil in the financial markets. The alliance's losses in turn created significant potential that BankAmerica would have to recognize substantial losses itself as a result of its relationship with the alliance. These losses and risk of loss were not adequately disclosed in certain Forms 10-K, 10-Q and 8-K filed by BankAmerica with the Commission.
More specifically, the Commission found that, during 1997 and 1998, BankAmerica described business advantages of the alliance in filings made on Forms 10-K and 10-Q. These filings, however, were deficient in that they did not disclose the market risks to which the alliance exposed BankAmerica and the potential for substantial losses arising out of those risks.
The Commission further found that, in a filing made with the Commission on Form 8-K on September 15, 1998, BankAmerica discussed certain of the effects on its operations of the worldwide financial turmoil caused by the fiscal and monetary crisis of the Russian Federation. This release, however, was inadequate, in that it did not disclose that the alliance had incurred substantial losses that presented increasing potential for substantial losses to BankAmerica at the close of its third quarter on September 30, 1998. Eventually, on October 14, 1998, Bank of America Corp. disclosed that it had taken a $372 million "writedown" as of September 30, 1998, as a result of the activities of the alliance. Net income reported by Bank of America Corp. for the quarter ended September 30, 1998 was $374 million.
Based on its findings, the Commission found that Bank of America Corp. violated Section 13(a) of the Securities Exchange Act of 1934 and Rules 13a-1, 13a-11, 13a-13 and Rule 12b-20 by making materially misleading filings as described above. Bank of America Corp. was ordered to cease and desist from further violations of these provisions. (Rel. 34-44613, AAE Rel. 1429); File No. 3-10541).
The persons to contact with questions are Thomas Newkirk, +1 202 942-4550 or Leonard W. Wang, +1 202 942-4828.
