SEC v. Bank of America Corp.; Attorney-Client Communications to be Aired

Two of the questions I posed in my post of September 25, 2009 have now been answered. Both the SEC and Bank of America have demanded trial by jury, and the Bank has decided to waive the attorney-client privilege as to communications relevant to the SEC’s complaint against the Bank.

The SEC was first to file a jury trial demand, followed by the Bank. While presenting a 100-page plus legal document to a jury for review is always a challenge, the fundamental question in this case – whether the Bank should have disclosed its agreement with Merrill to allow the payment of up to $5.8 billion in fourth quarter bonuses to Merrill employees – is straightforward, and it would not surprise this observer if the SEC relishes the prospect of having a panel of ordinary New Yorkers pass upon the compensation mores of Wall Street bankers. Perhaps also factoring into the SEC’s decision, and the Bank’s, is a concern over Judge Rakoff, who has demonstrated that he can be a loose cannon.

The Bank’s decision to waive the attorney-client privilege is more surprising, characterized as a “bombshell reversal” by The American Lawyer. Perhaps if the question of waiving the privilege involved only this case, the Bank would have maintained its position and not waived the privilege, but clearly more is at stake, including Congressional inquiries and the pressure being exerted by New York Attorney General Andrew Cuomo. As the Wall Street Journal reports, the “new more conciliatory legal approach is in part intended to pave the way to a settlement of various investigations, say people familiar with the matter.” WSJ, October 13, 2009 at C1, col. 2.

The Bank’s waiver is set forth in a stipulation with the SEC dated October 12, 2009, and is carefully drafted to limit the waiver only to those communications relevant to the matters at issue in the SEC’s complaint against the Bank. This restricted waiver responds to one of the concerns I expressed in my post of September 25 that any waiver could extend to other litigation. Judge Rakoff has accepted the stipulation, although characteristically he couldn’t resist editorializing, chastising the parties for draping the stipulation in “legalese – with the complete first sentence extending over two-and-a-quarter single-spaced pages and featuring no fewer than nine recitations of the word ‘Whereas’.” Order of October 14, 2009. As the Judge characterizes the stipulation:

“It would allow the Bank of America to waive attorney-client privilege and work-product protection regarding certain categories of information material to this case … without thereby waiving such privilege and protection regarding other information that may be of interest in related private lawsuits.”

The matter was of sufficient importance that it went to the highest decision-making level at the Bank – its Board of Directors. It is hard to believe that the Board would have made this decision without believing that none of the affected communications – emails and the like between the Bank and its lawyers, both in-house and at the Wachtell firm, and communications between Merrill and its in-house and outside counsel at Shearman & Sterling – will cast a bad light on either the Bank or its executives.

It may be a different matter for Wachtell. The New York Times, in its article on the waiver, reported that “Wachtell lobbied to keep its advice protected …” (NY Times, October 13, 2009 at B10, col. 6 (the same article quotes a spokesman for Wachtell as claiming the report of its opposition to a waiver to be “totally erroneous”).

The Bank’s position all along, as detailed in the SEC’s briefs in support of the settlement, now rejected by Judge Rakoff, is that it relied upon Wachtell to draft the October 31, 2008 proxy statement used to solicit the Bank’s shareholders to approve the Merrill merger, and that it was Wachtell that made the determination not to explicitly include the Bank’s agreement to permit the payment of up to $5.8 billion in year-end bonuses in the proxy statement itself rather than just in the disclosure schedule included as part of the merger agreement (but not filed with the SEC or made publicly available). So disclosing all attorney-client communications between the Bank and Wachtell can only create discomfort for the firm, and separate it from the Bank.

I surmised in my post of September 3, 2009 there are at least three possible explanations for the Bank’s (or, according to the Bank, Wachtell’s) failure to disclose the Bank’s bonus agreement with Merrill in the proxy statement itself:

“(i) The parties, concerned over the reaction by BofA’s stockholders to any disclosure of the agreement on payment of year-end bonuses, deliberately buried their agreement on the payment of bonuses in the disclosure schedule;

(ii) The parties did not consider the agreement material and therefore concluded that no disclosure of it was necessary; or

(iii) The failure to disclose the agreement was a boot.”

If the new material discloses that Wachtell’s lawyers consciously decided not to disclose the bonus agreement in the proxy statement but leave it to the disclosure schedule, then the SEC could very well add the responsible lawyers to its complaint against the Bank as “aiders and abettors” of the Bank’s violations or as parties who “caused” the Bank’s violations. I speculated in my post of September 9 that the third possibility is the likely one, given the time pressures under which this deal was done: the omission of the bonus agreement in the text of the proxy statement was an oversight. It will be interesting to see what the disclosed materials reveal.

But then again, all of the materials may not be revealed. Uncommunicated work product by a lawyer, such as memos to file not distributed to the client, research memos, and internal communications, may not be within the reach of the Bank’s waiver. Generally, a law firm need not disclose uncommunicated work product, since that is a privilege of the firm, not the client, except in disputes between the client and the firm over the competence of the firm’s legal services. So it could very well turn out that Wachtell will resist emptying its files for the SEC, at least to the extent of uncommunicated Wachtell work product relating to the engagement. It is conceivable, therefore, that the mystery of why the Bank’s agreement with Merrill on the payment of year-end bonuses is included in the disclosure schedule but not in the proxy statement will remain a mystery.

What we can anticipate is the type of embarrassing disclosures that inevitably accompany the production of emails. It continues to astound this observer that individuals who should know better treat email communications like they do communications between fellow golfers in the steam room. Witness this email disclosure between otherwise sophisticated directors of the Bank (Charles K. Gifford and Thomas May) on January 15, 2009, made during a conference call among members of the Board and senior management about Merrill’s mounting losses:

[Gifford] “Unfortunately, it’s screw the shareholders !!”

[May] “No trail, ….”

[Gifford, responding to May’s admonition] “The context of a horrible economy !!! will effect everyone.”

[May] “Good comeback, …”

(NY Times, October 14, 2009, at B1, col. 4, and B4, col. 1)

With the production of attorney-client communications by the Bank, we can expect more of such embarrassing disclosures. Whether they prove more than just embarrassing will be the question.