For the Bank of America, it can only be described as a Wall Street perfect storm.  An endless stream of legal and regulatory issues - the latest dealing with a bank's obligation to disclose a large lawsuit threat.  Take for example, the $10 billion lawsuit filed by American International Group on 8/8/11.  On that day, BofA shares fell more than 20%.  It wasn't until Warren Buffett stepped up with a $5 billion investment that fears of the bank's instability were eased, though hardly eliminated. 

Yet, it's now revealed that top lawyers for the bank knew as early as January that AIG was prepared to sue BofA for more than $10 billion - 7 months before the lawsuit was filed. At no time did Bank of America make any mention of the lawsuit threat - not in any of its SEC filings, including the one it filed on 8/4/11.  Nor did management discuss the matter on conference calls about quarterly results and other pending legal claims.

ThomsonReuters News and Insights notes that SEC rules for litigation disclosure are murky, which is confirmed by some lawyers who said Bank of America may have been justified in not revealing AIG's lawsuit before it was filed.  The bank's litigation disclosures are in line with those of many rivals.  Other lawyers, however, say banks have an obligation to disclose legal threats that could have major consequences.

"Publicly owned companies are supposed to disclose material threatened litigation under generally accepted accounting principles."  -- Richard Rowe, former director of the SEC's Division of Corporation Finance.    Mr. Rowe, now with Proskauer Rose, said general speaking bank executives must make a "judgment call" as to what is material, but "the general rule is, if it's threatened litigation and it's material, and you can put a number on it, you should disclose it."

Given the size of AIG's lawsuit, and the fact that it came "out of left field," illustrates why investors are so fearful - they have no idea what skeletons may be lurking in behind closed doors.  Failure to disclose such a lawsuit threat only added to the credibility problem that confronts BofA management.  And the perception is that it's likely the bank continues to under-address or under-disclose on the mortgage issue.

SEC Directives to Disclose More.   SEC staff have this year advised banks, including BofA, JPMorgan, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley to disclose more information about lawsuits that have been filed, as well as legal proceedings that they know the government is considering.  And banks have responded by providing additional information, including legal loss estimates in some cases.

It's understood, however, that the Commission has given banks more leeway in disclosing the expected cost of early-stage litigation, or threats of litigation whose outcome is more difficult to predict.  There are 2 standards for disclosing legal liabilities:  (i) One under banks' legal proceedings relies on whether losses are "reasonably probable" and "reasonably estimable."  (ii) Under management's discussion and analysis, it's based on whether losses are "reasonably possible."  Disclosure relies heavily on management's assessment of the merits of a case.

C-I encourages its readers to read the complete version of this fascinating article.  To continue, go to:   [ThomsonReuters News and Insights, 8/30/11]

The AIG lawsuit, filed on 8/8/11 is:  American International Group Inc et al v. Bank of America Corp et al, New York State Supreme Court, New York County No. 652199/2011.