The Great Bank Thievery

Stull advised the cities of Anaheim and San Jose and other clients to try to recover BofA overcharges. San Jose did sue, but settled for relative peanuts in 1994, releasing the bank from further claims in return for $260,500.

What Stull was discovering as a consultant disgusted him. At a 1994 social function, he spoke with Jeff Newman, a partner in the San Francisco law firm of Farella Braun & Martel, LLP. Stull described some of the BofA improprieties he had encountered as a consultant. Subsequently, FB&M took on Stull as a client, and in April 1995 filed, on his behalf, the biggest whistle-blower lawsuit in California history.

Stull's lawsuit was filed under California's whistle-blower law, which allows people who learn of wrongdoing that costs the government money to sue and, if they win, to keep a percentage of the recovered money. Stull wants 13 percent of any judgment entered in the Bank of America case, which could bring him and his lawyers tens or even hundreds of millions of dollars.

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.