SEC v. Bank of America Corp.: Bank of America Asserts the Advice of Counsel Defense

Following its October 12, 2009 decision to waive the attorney-client privilege as to communications between it (and Merrill Lynch) and their counsel regarding the disclosures concerning the payment of year-end 2008 discretionary bonuses, Bank of America took the next logical step and, in its answer to the SEC’s amended complaint, dated October 30, 2009, has now asserted, as an affirmative defense, that the Bank “reasonably and in good faith relied on counsel with respect to the matters alleged in the [SEC’s] Amended Complaint.”

So the Bank has come full circle, from taking the position, during the SEC’s investigation of its proxy statement disclosures, that it would not waive the attorney-client privilege while at the same time not formally asserting the advice of counsel defense, to now waiving the privilege and formally asserting the defense. The Bank was emphatic on these points in its briefs filed with the Court in support of its settlement with the SEC (now rejected by Judge Rakoff):

“In the August 25 Order, the Court also asked whether Bank of America had waived the attorney-client privilege by allegedly asserting that it relied on counsel. The answer is indisputably no for at least three reasons. First, no Bank of America or Merrill Lynch witnesses told the SEC that they relied on the advice of counsel with respect to the matter at issue here. At most, when asked, Bank of America and Merrill Lynch witnesses answered that they delegated to counsel the responsibility for preparing the Proxy Statement, including the section at issue here. Second, no Bank of America or Merrill Lynch witnesses revealed the content of any confidential communication with counsel. Third, neither Bank of America nor Merrill Lynch has ever invoked reliance on advice of counsel as a defense to a claim by the SEC in litigation.”

Bank’s Reply Memorandum, dated September 9, 2009, at 2 (footnote omitted).

A. So Why Assert the Defense Now?

I speculated in my post of October 15, 2009 that the Bank may have waived privilege in this case because of pressure it was receiving from other quarters, including Congress and New York Attorney General Andrew Cuomo. I also speculated, given that the decision on waiver went to the highest level at the Bank — its Board of Directors — that it would be surprising indeed if any of the privileged materials now to be disclosed would prejudice the Bank’s defense. In all events, once the Bank made the decision to waive the privilege as to communications between it (and Merrill) and their counsel — Wachtell (counsel to the Bank) and Shearman & Sterling (counsel to Merrill), why not assert an advice of counsel defense? After all, the Bank has consistently asserted that the drafting of the November 3, 2008 proxy statement was done by the lawyers and disclosure decisions were made by the lawyers. So why not let the lawyers defend the disclosures (and omissions) in the proxy statement?

But, as a technical matter, it’s not clear what the advice of counsel defense will do for the Bank. The SEC, in its amended complaint, which sharpens its allegations against the Bank, does not name any additional parties, including any officers of the Bank or any of the Bank’s or Merrill’s lawyers. “Scienter” is not an element of the SEC’s claim of proxy violations against the Bank. The SEC need not establish that the Bank, in omitting to disclose publicly its agreement with Merrill on the payment of year-end 2008 discretionary bonuses, was “conscious” of the violation or reckless in not disclosing the agreement in light of the requirements of the proxy rules. As the SEC explained in its initial brief in support of its settlement with the Bank:

“There is no scienter requirement for a violation of Section 14(a) of the Exchange Act and Rule 14a-9. A misleading proxy statement violates these provisions even if the company filing the statement ‘believed in perfect good faith that there was nothing misleading in the proxy materials.’ . . . Liability may be imposed based on negligent conduct. . . . (misstatements need not have ‘resulted from knowing conduct’ and ‘[l]iability can be imposed for negligently drafting a proxy statement’). As the Seventh Circuit explained in a recent case, negligence in this context simply describes the issuer’s failure to comply with the law: ‘Section 14(a) requires proof only that the proxy solicitation was misleading, implying at worst negligence by the issuer. And negligence is not a state of mind; it is a failure, whether conscious or even unavoidable . . . to come up to the specified standard of care.’”

SEC’s Memorandum, dated August 24, 2009, at 19 (citations omitted).

If the SEC need not establish scienter by the Bank to make out its claims of proxy rule violations by the Bank, then it is not clear what purpose the advice of counsel defense serves. You can’t justify driving 60 miles an hour in a 25-mile school zone on the ground that your lawyer told you it was OK. Similarly, even if Wachtell rendered a written opinion to the Bank that the omission of the year-end bonuses agreement articulated in the Disclosure Schedule to the Bank/Merrill Merger Agreement from the proxy statement was permissible under the proxy rules, that opinion would not exonerate the Bank from liability if Judge Rakoff finds that the proxy rules required disclosure of the agreement in the proxy statement.

The Bank’s position is that a violation of the proxy rules requires a finding of negligence, and that there was no negligence in the drafting of the BofA/Merrill proxy statement:

“The Proxy Statement was drafted by expert counsel for both Bank of America and Merrill Lynch. It followed the state-of-the-art custom and practice in the legal industry.”

Bank’s Memorandum, dated August 24, 2009, at 27.

Perhaps the Bank intends to rely on the advice of Wachtell to establish that it was not negligent in omitting to disclose the agreement on payment of year-end 2008 discretionary bonuses from the proxy statement. But, as the Seventh Circuit observed in Beck v. Dobrowski, 559 F.3d 680, 682 (7th Cir. 2009), “Section 14(a) requires proof only that the proxy solicitation was misleading, ….” What BofA’s or Merrill’s counsel may have opined on that question should be irrelevant to this question.

B. What Proffering the Defense Will Do

Make life uncomfortable for a lot of lawyers. With the Bank’s waiver of the privilege, the SEC will be reviewing a lot of documents and emails by Wachtell and Shearman & Sterling (as well as in-house counsel) relevant to the proxy statement disclosures. One or more of these lawyers may be called to testify at trial, if a trial occurs. Such scrutiny cannot be welcome to transaction lawyers. And, of course, there is the risk that, if counsel consciously addressed the question of disclosing the agreement on payment of year-end 2008 discretionary bonuses, set forth in the Disclosure Statement to the Merger Agreement, in the proxy statement, and consciously decided not to do so, then such counsel could find themselves named as parties defendant to the SEC’s lawsuit against the Bank or brought up on separate administrative or civil proceedings by the Commission.

So the Bank’s waiver of the attorney-client privilege and its assertion of the advice of counsel defense cannot have sat well with the managing partners of Wachtell or Shearman & Sterling.