Lungren Suit Alleges Bank Bilked Cities, State

Atty. Gen. Dan Lungren filed a lawsuit against Bank of America on Monday, charging the bank with mishandling “hundreds of millions of dollars” in state and municipal bond money and creating false records to cover up “deceptive and fraudulent practices.”

Lungren’s action, which follows a similar suit filed last week by the city of San Francisco, accuses Bank of America of “knowingly” keeping money to which it was not entitled, deliberately overcharging government customers and losing or destroying pertinent records.

In a prepared statement, Bank of America General Counsel James N. Roethe rejected the state’s charge of intentional wrongdoing and cover-up. Roethe acknowledged, however, that the bank’s clients had suffered because of its mistakes and pledged to repay what is owed.

Lungren’s suit, filed in San Francisco Superior Court, follows a two-year investigation by the attorney general’s office and an attempt at mediation between the bank and representatives of state and local governments.

Los Angeles, which previously did most of its $1-billion bond business with Bank of America, has been monitoring the attorney general’s investigation and could receive a portion of what the state eventually recovers.

Although Lungren’s suit seeks the return of hundreds of millions of dollars, the legal damages could potentially reach the billions, according to a lawyer close to the case. The allegations cited in the lawsuit are filed under the False Claims Act, which covers defrauding of government. The act requires that damages be trebled if a court finds that the bank has made or used false records to avoid an obligation to return money to the government, the attorney said.

But Peter Magnani, a spokesman for Bank of America, said bank officials do not expect the litigation to have a “materially adverse effect on our financial condition.”

The lawsuit charges that the bank should have returned hundreds of millions of dollars in unclaimed bond money to the state or its municipalities from April 1978 through 1995, when the bank sold its trust division. In its suit, San Francisco cited identical practices in asking the bank to return at least $12 million to the city.

The money in question primarily involves two things--overcharges that the bank allegedly levied on its state and municipal customers, and principal and interest on bonds that bondholders failed to collect. Under the law, that uncollected money should have been returned either to the state or the municipalities after three years.

Lungren said his investigation revealed that the bank had returned only a small portion of the unclaimed principal and interest to the bond issuers.

“In order to keep money that did not belong to it” the lawsuit charges, “. . . the bank lost or destroyed records and adopted various deceptive and fraudulent practices and policies, including the making and use of false statements and records.”

The suit asks the bank to account for all the money placed in its corporate trust accounts for all bonds issued in California from 1978 through 1993.

“The bank’s retention of money to which it was not entitled [was] knowing, systematic, widespread and chronic,” the lawsuit charges. “As a result of its unlawful activities, the bank deprived the people of California of large sums of money that would otherwise have been available for public services.”

Bank of America, the state’s largest and the nation’s third-largest bank, acted as the state’s biggest bond trustee for years, serving municipalities and the state government.

Roethe, in his statement, said the bank had made a diligent effort to remedy its accounting problem.

“It’s one thing to have an honest argument about money,” he said. “It’s something else entirely to impugn the character and integrity of an institution that has worked as hard as Bank of America to help resolve these issues.

“As we have said before, this claim stems from unintentional errors the bank committed . . . and we stand ready to make full repayment to the state and to any bond issuer that was affected by these errors,” Roethe said.

He said the bank will submit to an outside audit to determine how much the bank kept in unclaimed bond funds.

A former Bank of America vice president, Patrick Stull, first accused the bank of mishandling bond money in a 1995 “whistle-blower” suit, which was sealed and prompted Lungren’s probe. Under the state whistle-blower law, Stull would be entitled to a percentage of whatever money the bank must pay.

Before Lungren’s filing of the suit Monday, state Treasurer Matt Fong issued a statement “to calm any nervousness” by bondholders. He noted that the legal dispute revolves around money the bank may owe to governments that issued the bonds, not the bondholders.

“This dispute does not impact current individual or institutional bondholders or investors who are considering buying California bonds,” Fong said. “They need not be concerned that California bonds will be adversely affected.”

Officials at Bank of America previously blamed the problems in part on their merger with Security Pacific National Bank in 1992. They said the bank discovered overcharge errors and voluntarily refunded about $5 million to municipalities throughout the state.

Lungren declined to comment on the lawsuit, releasing instead a statement that summarized the allegations. The statement said that his office had been attempting to mediate the dispute to avoid excessive litigation costs.

San Francisco was a party to Lungren’s mediation with the bank but decided to file suit independently after the city felt that the talks were going nowhere, officials said.