A Florida investor filed a federal class action against Regions Financial Corp., alleging that when the bank tried to obtain shareholder approval for a 2006 acquisition, it misrepresented its financial condition to the investors.
John M. McClellan, a Regions shareholder in Blountstown, Fla., alleges in the suit that in November 2006, as the firm prepared for the $10 billion purchase of AmSouth Corp., a slate of former Regions directors and executives — including Regions' president and chief executive C. Dowd Ritter — made false representations about the benefits of combining the two banks into a single operation.
Merrill Lynch & Co., Regions' adviser in the transaction, and Ernst & Young LLP, the auditor to both banks, were also named defendants in the suit, which was filed in the U.S. District Court for the Northern District of Alabama.
Mr. McClellan alleges that Merrill and Ernst & Young permitted Regions to file false statements with the Securities and Exchange Commission that hid the financial condition of both banks, painting a falsely positive picture for investors when the time came for them to vote on the acquisition. As a result, Regions' shareholders were misled on the impact of the acquisition and thus didn't know that the purchase could potentially expose them to losses, according to the lawsuit.
In January, Regions' announced a $6 billion write-down of goodwill stemming from the AmSouth acquisition. AmSouth was supposed to bring about $6 billion in goodwill to Regions, plus the prospects of doubling its operations in Florida's real estate market.
However, that goodwill was overstated, according to the claim, and AmSouth's burgeoning presence in Florida's real estate market later suffered substantially when the housing bubble burst. In the proxy statements, Regions failed to properly account for the value attributed to AmSouth and produced inaccurate pro forma balance sheets for the combined entity, according to Mr. McClellan's claim.
Mr. McClellan claims that if it weren't for the misleading information in the proxy, he would not have voted in favor of the merger. He is suing for damages, plus interest — which will be determined at trial — and attorney's fees
Joe R. Whatley, Mr. McClellan's attorney, did not immediately return calls.
Tim Deighton, spokesman at Regions, said "we believe this case is without merit and we are planning a vigorous defense."
Calls to Merrill Lynch and Ernst & Young were not immediately returned.