Bank of America Corp. (NYSE: BAC) is settling a class action lawsuit over its purchase of Merrill Lynch. The company said that it would be taking a litigation expense in the third quarter of about $1.6 billion as a result. This expense will negatively impact the bank’s earnings per share by about $0.28 in this third quarter of 2012.

Today’s settlement is subject to court approval and it effectively puts the 2009 case behind the company. Unfortunately, its tacks on another $1.6 billion to the purchase price of Merrill Lynch, for all practical purposes.

In the total outlays, Bank of America would pay $2.43 billion and institute certain corporate governance policies after allegations that the bank and its officers made false or misleading statements about the financial health of Bank of America and Merrill Lynch. On this note it responded:

Bank of America denies the allegations and is entering into this settlement to eliminate the uncertainties, burden and expense of further protracted litigation. Resolving this litigation removes uncertainty and risk and is in the best interests of our shareholders.

The proposed settlement will be reviewed by Judge Kevin Castel in the U.S. District Court for the Southern District of New York, where the class action is pending. It further noted:

The amount to be paid under the proposed settlement will be covered by a combination of Bank of America’s existing litigation reserves and incremental litigation expense to be recorded in the third quarter of 2012. The company estimates total litigation expense will be approximately $1.6 billion for the three months ended September 30, 2012, which includes the incremental costs of the related settlement above previous accruals and other litigation-related items.

The settlement agreement also contemplates that Bank of America will institute and/or continue certain corporate governance enhancements until January 1, 2015, including those relating to majority voting in director elections, annual disclosure of non-compliance with stock ownership guidelines, policies for a board committee regarding future acquisitions, the independence of the board’s compensation committee and its compensation consultants, and conducting an annual “say-on-pay” vote by shareholders.

Bank of America shares are down nearly 1% at $8.89 in premarket trading, but trading volume is not through the roof. Its 52-week range is $4.92 to $10.10.

JON C. OGG

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