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Bank of America’s lawyers were aware that AIG was prepared to file a $10 billion lawsuit against the institution as early as 7 months before its filing, Reuters reports.Bank of America made no mention of the suit in its quarterly SEC filing, which was released on August 4th. It didn’t say anything of a potential suit on conference calls, either.
But on August 8th, AIG filed suit, Bank of America’s stock plummeted, and the rest is history (or $5 billion in preferred stock for Warren Buffett).
Lawyers disagree as to whether Bank of America was obliged to report the lawsuit, as SEC rules on the matter are vague. But according to Richard Rowe, the former Director of the SEC’s Division of Corporate Finance, while bank’s get to make a judgment call on whether or not to report, if the accusation is “material” and there’s “a number on it”, it should be reported.
So then, the question becomes, “what is material”? The SEC hasn’t forced any of of America’s six largest banks to disclose detailed information about lawsuits in their early stages.
That means shareholders can either sell in the early days of trouble, or hang on and see what happens. In Bank of America’s case, we know what choice they made.