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?

This spring, San Francisco City Attorney Louise Renne held a press conference to announce the city had joined a lawsuit that accuses the Bank of America of cheating California governments out of hundreds of millions -- and perhaps billions -- of dollars. The most succinct explanation of BofA's supposed wrongdoing is contained in court papers the city filed several months later.

"The Bank's acts," city attorneys wrote, "can be likened to an accountant who commingles his own money with client funds and then loses control of the client's records. The accountant deals with the problem by shredding the client's bills, canceled checks, and check registers. The accountant then waits to see if the client notices. If the client doesn't, then the accountant keeps all of the money. If the client complains, the accountant demands the client prove how much is owed."

The lawsuit the city joined does indeed allege a truly astonishing pattern of utterly brazen thievery. In the suit, a former Bank of America executive, the city, the state, and more than 200 other jurisdictions have come together to accuse the largest bank in California -- and one of the state's major political power centers -- of 274 paragraphs full of fraud, theft, and conspiracy, as well as the willful destruction of evidence detailing that fraud, theft, and conspiracy. If it gets to trial and if the bank loses, the suit could seriously affect -- perhaps even bankrupt -- BankAmerica, the holding company that owns BofA.

The state, for its part, claims BofA should repay California governments somewhere between $1 billion and $3 billion. And the law under which the suit was filed allows for a tripling of damages.

But the lawsuit's ramifications stretch beyond the civil courthouse and involve more than the financial health of a major bank. As the litigation against Bank of America proceeds, a mountain of bank and government paperwork is coming into the public domain as evidence in the case. That paperwork is making three things increasingly clear:

If the civil violations alleged against Bank of America are true, they probably also constitute the largest criminal conspiracy in California history.

No one appears to be making any attempt to hold the bank, its officers, or its directors criminally accountable for what are alleged to have been huge, repeated, and intentional embezzlements of public funds.

And for years city financial officials either knew or should have known that the Bank of America was improperly taking large amounts of money that belonged to San Francisco taxpayers -- and those officials did absolutely nothing about it.

Educated in economics and philosophy at San Diego State University during the Vietnam War, Patrick Stull took a job at the Bank of America in 1978. He had just escaped the "conservative" clutches of Ross Perot's Electronic Database Systems Inc. Stull thought the folks at San Francisco's BofA were much hipper than Perot. "I was a good BofA employee," says Stull, now 50.

An expert in cash management, Stull soon became a vice president and in the late 1980s was assigned to help "clean up" BofA's Corporate Trust Division in San Francisco. Among other things, the trust division handled the municipal bond accounts of many of California's local governments, including the city of San Francisco. In general terms, the division took care of the details of municipal borrowing, making sure principal and interest payments went to the institutions and people who bought bonds sold by local governments to finance roads, sewers, airports, and other capital projects.

If the tasks were routine, the amounts of money were not. A river of some $100 billion in public bond funds streamed through the trust division between the late 1970s and the early 1990s, court records say.

Late in the last decade, the bank was converting from an antiquated data-entry record-keeping system to Bondmaster, a computer program that tracks payments made by the bank on behalf of municipal bond issuers. "The place was a total disaster," Stull recalls. "There was no organization, no controls; posters of unclad women adorned the walls."

Although aware generally of problems with the handling of bond accounts, Stull says, his role in the trust division make-over did not bring him into contact with anything that he considered unethical or illegal. He left the bank suddenly in 1990 when a severe family health problem compelled him to rethink his life. (He requested that the details of that problem not be revealed.)

Stull set up a consulting firm, The Municipal Group, and began advising municipalities on cash management. In that role, he began encountering Bank of America, one of the state's main depositories for government funds. Over time, Stull says, he discovered that BofA was overcharging these cities for trustee services and investing public money entrusted to it in improper ways -- such as in the bank's own money market funds, a placement that raises conflict-of-interest questions. Stull also realized that BofA was holding onto public money it was not entitled to keep.

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.

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.

And the civil law violations alleged against BofA also have civil and criminal counterparts in federal banking and securities laws.

The task force the attorney general assigned to investigate Stull's claims has stated for the record that at least some of BofA's actions constitute the theft of public funds. As Patrick J. Mahoney, the deputy city attorney tasked with San Francisco's prosecution of BofA, recently wrote, "At the heart of this case is the charge that one of the nation's leading banks has wrongfully taken the public's money for a long time."

Yet the government attorneys in the Stull case resolutely duck the question of whether criminal charges might be filed against Bank of America or its officers and directors. The catchword seems to be "prosecutorial discretion"; that is, the authority a prosecutor has to decide whether civil, criminal, or no legal action best serves the ends of justice.

When asked about the possibility of a criminal probe, Deputy Attorney General Brian Taugher said that "certain of the bank's transactions" could open the bank to "criminal liability." Taugher said, however, it is harder to prove intent to defraud "beyond a reasonable doubt," as required in a criminal case, than to meet the lesser standard of guilt for a civil court judgment, which is based on "a preponderance of the evidence."

Although Stull filed his lawsuit some 30 months ago, City Attorney Louise Renne has yet to refer the case to District Attorney Terence Hallinan for review. (In a recent interview, Hallinan said he would "look into it" without giving any specific indication about how deep or long a look his office might give to the many and complicated offenses BofA is alleged to have committed.)

The Federal Reserve office in San Francisco declined to reveal whether an investigation has been or would be conducted. Neither the U.S. attorney nor the Securities and Exchange Commission responded to telephone inquiries.

There are many possible explanations for the apparent lack of criminal investigation of what would probably, if proven, constitute the largest white-collar theft in California history.

First, criminal inquiry could be proceeding, but in secret.
Then again, prosecutors could just be slow off the mark, and will eventually mount a serious criminal investigation.

Or the city attorney, district attorney, California attorney general, and U.S. attorney could all find, within their own judgment and discretion, that the violations alleged against BofA are best remedied in civil court, and that a criminal action would be expensive and difficult to win.

But there are other possible explanations -- less savory explanations -- for the lack of criminal prosecution of those responsible for the alleged theft of public funds described in Stull. It is a simple fact that the Bank of America has long been deeply entwined in the elite circles where California business and politics meet. (A minor but instructive example: Kathleen Brown, who served as state treasurer during the first half of the 1990s, is now a senior executive vice president with BofA. Brown is in charge of assisting "high-net-worth and emerging wealth clients in Southern California," according to a BofA press release.)

Criminal action against the bank or its leaders could be fraught with political risk. At the very least, prosecuting the Bank of America in criminal court would be politically embarrassing.

Such a prosecution would be embarrassing because, if BofA did everything it is alleged to have done, records now in the public domain show that the governments claiming to have been cheated by the bank knew -- or certainly should have known -- that they were being cheated.

In other words, if a prosecutor seeks indictment of BofA or its officials, that prosecutor might have a difficult time not looking very closely at officials in the government who appear to have signed off on, or ignored, the bank's alleged offenses.

Nestled inside 10 linear feet of San Francisco Superior Court filings, BofA corporate reports seem to tell a torrid tale of unbounded greed. They appear to show that BofA engaged in the systematic, calculated theft of public funds. Each charge in the constantly evolving lawsuit is backed by records selected from a Mount Everest of paper produced by the bank.

The vital question now before the court is: How much does the Bank of America owe to state and local governments? BofA admits it failed to escheat some unclaimed bond funds and inadvertently invoiced some fee overcharges to those governments. The bank says that these "discrepancies" were caused by "computer programming errors."

A few weeks after Stull's April 1995 filing, BofA began escheating small amounts of money to the state and returning small amounts of excess fee charges to local jurisdictions. To date, the bank has coughed up $48 million. But it has refused to make further payments and declines to reveal how it arrived at its $48 million figure.

BankAmerica says the plaintiffs are welcome to calculate how much they think they might be owed. To help them out, the bank has offered to produce documents that would, if lined up end to end, stretch for 100,000 miles. According to court records, Stull's original handful of evidence has already expanded to 600 million pages of documents.

"This is a classic defense strategy," Deputy City Attorney Mahoney says. "Drown the plaintiffs in meaningless documents and abdicate any responsibility for reviewing the records. ... The bank would like to prevent the public from knowing how badly it abused its trust. ... [BofA] knew it was stealing from the public."

The plaintiffs in the Stull lawsuit say that the bank cannot -- in reality -- calculate how much it owes them, because the bank systematically destroyed vital "paying agent" records. Every time the bank's auditors uncovered an "error," say the plaintiffs, the bank vaporized the trail of accounting records related to that "error."

In short, Stull claims, the bank hid its illegal transactions from municipal officials.

But BofA has a different story. BofA blames publicly elected treasurers, statewide, for not being able to document exactly how much the bank owes. The bank claims that the treasurers were supposed to bill the bank for unclaimed bond funds. Furthermore, insists BofA, public officials signed off on the very fee and investment transactions that now are being questioned.

Court exhibits and records obtained from the San Francisco city treasurer's office support many BofA claims. Those records show that San Francisco's treasurer received daily, monthly, and annual reports from BofA. Trust account operations were broken down to small details, and periodically summarized.

Three boxes of BofA invoices and trustee reports show that the city treasurer's office approved at least some of the types of transactions that the city attorney is now holding up as proof of massive theft. For example, Stull alleges that exorbitant billings for "miscellaneous" trustee fees were often false BofA claims. Yet BofA invoices with lump-sum $90,000 fees labeled as "miscellaneous" were routinely OK'd by the San Francisco Treasurer's Office.

Court pleadings filed in Stull allege that BofA regularly billed for interest payments on bonds that had expired. BofA invoices show that the San Francisco Treasurer's Office made these types of payments without complaint.

City Treasurer Mary Callanan and City Controller Edward Harrington declined to comment on these issues. On the other hand, the city's independent auditors, KPMG Peat Marwick, LLP, have not been silent. Peat Marwick has been telling San Francisco's treasurer and controller to clean up their acts for a decade -- to no avail. Like BofA, the treasurer and controller have blamed their problems on "computers."

And they have certainly had problems.
On March 30, 1997, Peat Marwick released an audit that damned the city's internal financial controls. City officials responded with silence.

"Historically," the auditors wrote, "the Treasurer's Office and the Controller's Office have experienced difficulty in preparing the monthly and year-end bank reconciliations and developing the information required for financial disclosure." The auditors reported that the city's general accounting ledger does not balance, and that the treasurer and controller are not accurately tracking billions in city bond and investment funds.

In 1995, an internal audit released by City Controller Harrington criticized Callanan for "failing to review and monitor [the city's] relationship with BofA."

In June 1997, Bank of America attorneys happily agreed. "Had the responsible San Francisco city officials reviewed monthly accounting statements prepared by the Bank," they wrote, "the Bank's investment in money market mutual funds would have been readily apparent to these officials."

And those "excessive" fees, the attorneys declared with some hint of sarcasm, were approved, too. "Issuers received monthly accounting statements which showed the exact amount of the fee," a BofA court filing says. "The Bank urges City Attorneys to check with their City Treasurer. We believe these officials were fully aware [of the content of] the fees being charged."

One BofA lawyer, Matthew L. Larrabee, put it more elegantly: "The core of the city's allegations damn the city."

Faced with tons of documents and dozens of high-priced squabbling lawyers, Superior Court Judge A. James Robertson II has split the mammoth Stull case in two. An April trial will address the question of how much money the bank owes -- or does not owe -- for unclaimed bond funds. A September trial will take on the subjects of false claims for fees and alleged self-dealing by BofA.

Attorneys on both sides say that the April trial will set precedents for later battles. The future of the case is being determined right now, as each side marshals its arguments. All the players agree: April will be the Waterloo of one side or the other.

Sometime after the April hearing, Judge Robertson will rule on whether BofA's bond trustee accounting records are reliable enough to be used in calculating possible BofA debts to the state and other governments. The judge has hired a certified public accountant, Francis Callahan, to help assess the accuracy of the records.

The 200-plus plaintiffs in the Stull case maintain that the accounting issue is relatively simple. The bank's records, they say, are bogus; all the audit trails showing that BofA improperly seized unclaimed bond funds have been destroyed. The amount of money the bank owes should, therefore, be calculated by using a benchmark -- 1 to 3 percent -- relating to the amount of bond funds that go unclaimed, industrywide. And that calculation should be tripled, as allowed under the whistle-blower law, giving Stull and the governments that have joined his lawsuit billions of dollars in damages.

But if Judge Robertson rules the bank's trustee records are coherent, he will use those records to determine how much money the bank does or does not owe for unclaimed funds. The plaintiffs fear this latter scenario like death because, they say, the existing bank records do not show the huge amount of bond funds that allegedly were embezzled through the years.

On the other hand, if the records are deemed unreliable, a jury will be impaneled to assess monetary damages owed by Bank of America. BofA's pleadings make clear the bank is eager to avoid a jury trial: "The enormously complex accounting issues would confuse the jury."

Nobody knows which of the 600 million BofA records Judge Robertson and his expert accountant will review as they struggle to decide if the bank's accounts are real or faked. As those documents are reviewed, the two main government attorneys involved in the whistle-blower case remain busy -- snarling at one another.

From the start of the Stull case, Attorney General Dan Lungren, a Republican, and City Attorney Louise Renne, a Democrat, have differed over fundamental strategy. According to Deputy City Attorney Mahoney, Renne wanted to put all of her eggs in the hands of accounting experts. Lungren, convinced BofA had eliminated the paper trail that accountants would need to calculate damages, preferred the industry benchmark approach.

"A false claims case is not an accounting case; it is inherently based in fraud and deceit," Lungren wrote the court in October 1997. "No accounting can be rendered due to fraud and deceit."

The many squabbles between the attorney general and the city attorney have sometimes been ridiculous, but seldom sublime. Some accuse Renne of filing San Francisco's intervention in the Stull case prematurely, to grab media attention.

Deputy City Attorney Mahoney retorts that the city filed because the state was conducting secret settlement negotiations with BofA. "We were not certain that the state would file in a timely manner," Mahoney says. Brian Taugher denies Mahoney's charge and claims Renne filed hastily, after receiving a call from a major television network.

Court records show that Renne had to refile her papers after the attorney general formally joined the whistle-blower lawsuit. The reason? Her first filing was procedurally incorrect.

By midsummer, Judge Robertson was so distressed by what he termed the "competing approach of various plaintiff's groups" that he created a "liaison counsel" to speak collectively for the entities suing BofA. But the judge's pleas for plaintiff unity have fallen on deaf ears. On Dec. 12, he heard preliminary arguments in a new squabble between Lungren and Renne over the division of the final $10.6 million payment BofA has agreed to make as part of the $48 million the bank has admitted it owes.

Renne and Lungren will air their dirty laundry again on Jan. 23. Judge Robertson's decision in this matter will set a precedent for how any future damages and penalties are distributed. Either Renne, or Lungren, will have to learn how to be a good loser if the case against Bank of America is to proceed smoothly.

Meanwhile, BankAmerica's primary advocates, the disciplined partners at Heller, Ehrman, White & McAuliffe, seem privately pleased by the internecine warfare on the other side of the case.

An epitaph is engraved in the reddish granite that decorates the lobby of BankAmerica's corporate headquarters in San Francisco: "A. P. Giannini founded the Bank of Italy in 1904 to 'serve the needs of others -- the only legitimate business in the world today.' His devotion to this far-sighted philosophy revolutionized the face of banking, and he lived to see his 'Bank for the little fellows' become Bank of America, the largest bank in the world."

By 1997, BankAmerica, BofA's corporate parent, had fallen to No. 32 in the ranking of the world's largest bank holding companies, a victim of the growth of foreign banking centers. But it is still a formidable financial entity, with $248 billion in assets. Last year, BankAmerica enjoyed a 15 percent profit on shareholder equity. It is madly buying financial service and high-tech companies to soak up excess capital.

A decade ago, however, things were not so rosy for BankAmerica. More than 200 U.S. banks failed in 1988. BofA's Corporate Trust Division had been rocked by a $650 million loss in a student loan securities deal it had helped engineer. Third World debt defaults zapped the bank's profits, and Chairman of the Board Samuel H. Armacost cried, "Every single short-term profit-making device ... that raped the future of the institution has already been done."

The bank was on the ropes and scrounging for dimes. According to Stull vs. Bank of America, that scrounging included the theft of hundreds of millions of dollars in public bond funds. "Since at least 1986," San Francisco's intervenor lawsuit claims, "the Bank has been fully aware that its Corporate Trust Department was out of control. ... The Bank was knowingly taking and keeping money that did not belong to it. ... The Bank committed acts maliciously, fraudulently, and oppressively, with the wrongful and fraudulent intention of injuring San Francisco from an improper and evil motive amounting to malice, and in conscious disregard of San Fran-cisco's rights."

Even though the city and state have shrilly accused Bank of America of fraud and theft, the institution seems confident that Stull will be settled in its favor. Bank of America has not formally disclosed the existence of Stull to its stockholders, contending that the litigation is "immaterial" to the bank's financial future. (Its auditors do not agree.)

There are signs that BofA may be justified in its optimism.
In May, Reuters reported: "Some [California] state officials are downplaying the dispute. State finance officials said they do not believe the lawsuit will hurt the bank's relationship with most California agencies. ... It's a lovers spat."

The city of Los Angeles joined the lawsuit only at the last minute and eschewed criminal prosecution. "For us it's not a matter of concern," Los Angeles County Treasurer Larry Monteilh told Reuters. "[BofA is] trying to do the right thing. I don't think the bank tried to pull the wool over anyone's eyes."

And the city of San Francisco, which is accusing Bank of America of fraud and theft, recently awarded BankAmerica a $500 million bond underwriting deal. BofA holds almost all of the city's cash on deposit. BofA supervises investment of most of the city's $12 billion in financial assets. Despite allegations of theft, fraud, and deceit, BofA remains profitably cozy with its accuser.

Whistle-blower Patrick Stull appears to be the major fly in Bank of America's ointment. As long as Farella Braun & Martel sticks with Stull, he will be able to object to any settlement he considers insufficient. And if Renne and Lungren drop out of the case, Stull can continue on alone.

Despite fears that BofA will try to defend itself in the court of public opinion by attacking his motives, Patrick Stull says he is in for the long haul and looking forward to the big payday.

"Nobody wants to put the bank out of business," Stull says. "But the bank has to pay. It has to learn there are penalties for lying, stealing, and covering up. It has to be subject to the law.

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