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The Great Bank Thievery 

The city and state say the Bank of America stole hundreds of millions -- even billions -- of dollars from the government. But didn't San Francisco finance officials know what was going on? And shouldn't B of A executives be under criminal investigation?

Wednesday, Dec 31 1997
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When it was filed on April 3, 1995, the lawsuit was sealed from public view by law; it was, however, distributed to city attorneys across California. The whistle-blower law requires the state attorney general to investigate allegations of false claims made against the public purse. If significant evidence that the government has been defrauded exists, the attorney general may elect to join a whistle-blower lawsuit and assume the lead in the prosecution.

The California Attorney General's Office mounted a "forensic" investigation, and for two years, Deputy Attorney General Brian Taugher (pronounced "tower") led a team of 12 California Department of Finance auditors through 400 million pages of BofA records. Stull vs. Bank of America finally saw the light of day in May 1997, when it was officially joined by the state of California, the city of San Francisco, and hundreds of California towns and cities.

As a result of the attorney general's investigation, the city and the state added numerous charges to Stull, including the accusation that "since Bank of America knew that it had failed to keep accurate records ... the Bank's policies amounted to theft of public funds."

Before 1986, most municipal bonds sold in America were "bearer" bonds; that is, the bonds were personally held by their owners and were negotiable instruments. They were as good as cash for whoever physically possessed them. The bond certificates themselves, often issued in $5,000 denominations, had coupons attached to them. Twice a year, a bondholder would "clip" a coupon on his bond and send it to the bond trustee -- for example, the Bank of America -- for payment of the interest due on the bond. At the end of a bond's term, usually 20 years, the bondholder would present the bearer bond to the trustee and receive its original principal value, e.g., $5,000.

Sometimes, however, bondholders would forget to submit interest coupons. Occasionally, they might lose the bond itself, or die before cashing it in, leaving heirs unaware of its existence or location. In these ways, the bond trustee would wind up holding unclaimed funds originally dedicated to paying off bond issues.

Even after a bond's retirement (or "call") date had come and gone, however, the trustee had obligations. State law required the trustee to maintain enough cash in the bond account to pay bondholders who showed up late to claim principal or interest payments. If there were any unclaimed funds three years after a bond's expiration date, they were, by law, to be returned -- or, in financial jargon, escheated -- to the government.

When BofA converted to the Bondmaster program for tracking bond payments, bank documents show, it discovered that there was often less cash in the bond accounts than was needed to pay off active bond issues. There was also not enough cash to pay off bondholders who came in late with "called" bond certificates. And this was no small problem; by 1992, the accounts were out of balance by $7.7 billion. At that point, it seems, BofA should have been obligated to put the entire $7.7 billion back into the accounts. Instead, the attorney general has charged, much of the bond money was used as a "giant slush fund" and was posted to the bank's ledgers as income to "increase" BankAmerica's profits.

Court papers filed in the Stull whistle-blower lawsuit claim that BofA electronically purged line items in its accounting books that showed the existence of unpaid bond funds. Wiping out evidence of this unclaimed money -- a process known as "force-balancing" -- saved BofA from having to return hundreds of millions, perhaps billions, of dollars to state and local governments, the suit claims.

The few bondholders who came in late for their money were paid. But the remainder of the unpaid money was not returned to state and local governments; it was kept by BofA, court records allege.

The $7.7 billion "reconciliation variance" did not please the bank's auditors. Starting in 1988, Ernst & Young dinged BofA with three "unsatisfactory" audit ratings in a row, in an industry where one unsatisfactory rating can be grounds for CEO departure. Court exhibits in Stull show that BankAmerica's board of directors should have been aware of what was going on. The bank's attitude, however, was summarized in a handwritten notation on an internal memo that acknowledged escheatment problems. A BofA official counseled: "Let sleeping dogs lie."

Despite the warnings from its accountants, court papers suggest, BofA continued to juggle bond accounts until it sold its Corporate Trust Division to Minneapolis-based First Bank System Inc. four months after Stull blew his whistle.

BofA and Security Pacific Bank -- purchased by BankAmerica in 1992 -- acted as trustees for the vast majority of bonded debt issued by California's civic institutions over the last two decades. Consequently, the California attorney general says, the Bank of America could owe the people of California as much as $3 billion -- that is, 3 percent of the $100 billion in bond funds entrusted to BofA and Security Pacific from 1978 to 1993.

The governments that have joined the Stull civil lawsuit allege that Bank of America failed to return unclaimed bond money, charged excessive fees for services, illicitly invested public money in its own deals, and deliberately destroyed the bank records that documented these events. These charges are being made in civil court; if the bank loses the suit, the punishment would come in the form of a monetary judgment. And that punishment could be severe. The whistle-blower law allows the tripling of damages, meaning that a $9 billion total judgment, although unlikely, is not impossible.

But the civil law violations alleged in Stull are mirrored in the California Penal Code. In criminal terms, the offenses might be termed felony theft, submittal of false claims to the government, the intentional embezzlement of public funds, and conspiracy to commit the aforementioned crimes.

About The Author

Peter Byrne

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