Bank of America/Merrill case: all the lawyers' fault?

By Cydney Posner

As you may recall, the SEC charged BofA with misleading shareholders by failing to disclose in the merger proxy statement an existing agreement to pay $5.8 billion in bonuses to Merrill Lynch executives. (See the post on 8/3/09) BofA had agreed to settle the SEC's charges and pay a penalty of $33 million, but Judge Rakoff of the SDNY refused to approve the settlement and ordered both sides to cough up a lot more detail. Apparently, he questioned the size of the penalty and wanted to know why the SEC chose to file a case against the company and not the executives who made the decisions about bonus disclosures. The SEC said the size of the penalty was fair in that it was not the payment of the enormous bonuses that was at the issue, but rather the failure to disclose them to shareholders. The SEC also said it decided not to file a case against executives from both firms because it had concluded that the executives acted in good faith based on what they were told by their lawyers. According to the NYT, the bank named its law firm, Wachtell Lipton, as well as Merrill's law firm, Shearman & Sterling, as responsible for the decision, but did not name which of its own executives approved the lawyers' decisions. In a more detailed filing, the SEC said BofA's decision to mention the bonuses in an attachment to its proxy statement had been made by the bank's outside lawyers and at least two lawyers in the bank's legal department. Judge Rakoff apparently said that BofA would waive attorney-client privilege if it tried to defend itself against the SEC's allegations by saying that it had relied on its lawyers. However, BofA's defense appears to be based primarily on its contention that there had been no false or misleading information in the proxy because, in light of the total mix of information available about the bonuses, including Merrill's financial statements, it was widely understood that big bonuses would be paid.

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