By Cydney Posner
As you may have read, Judge Rakoff has rejected the proposed settlement between the SEC and Bank of America regarding the proxy disclosure with respect to the Bank's acquisition of Merrill Lynch. (See my emails of 8/3/09 and 8/25/09.) His main complaint is the unfairness of proposing that "the shareholders who were the victims of the Bank's alleged misconduct now pay the penalty for that misconduct." The Judge noted that, while the SEC would normally seek recourse against the executives involved, the SEC claimed that the " 'investigative record is that lawyers for Bank of America and Merrill drafted the documents at issue and made the relevant decisions concerning disclosure of the bonuses.' Id. But if that is the case, why are the penalties not then sought from the lawyers?" That theme is repeated a number of times throughout the order: for example, the Judge notes that the "S.E.C. also claims it was stymied in determining individual liability because the Bank's executives said the lawyers made all the decisions but the Bank refused to waive attorney-client privilege. But it appears that the S.E.C. never seriously pursued whether the this constituted a waiver of the privilege, let alone whether it fit within the crime/fraud exception to the privilege. And even on its face, such testimony would seem to invite investigating the lawyers." The Judge seemed to be especially irked that the "very management that is accused of having lied to its shareholders [would now] determine how much of those victims' money should be used to make the case against the management go away,' which amount turns out to have been a pittance of the amount provided to BofA by the U.S. taxpayers. Instead, he views the proposed settlement as "a contrivance designed to provide the S.E.C. with the facade of enforcement and the management of the Bank with a quick resolution of an embarrassing inquiry...." and one that suggests "a rather cynical relationship between the parties: the S.E.C. gets to claim that it is exposing wrongdoing on the part of the Bank of America in a high-profile merger; the Bank's management gets to claim that they have been coerced into an onerous settlement by overzealous regulators." Finally, the Judge directed the parties to file a case management plan with the court, looking toward a February 2010 trial date. (Lots of emails likely to be produced in evidence there!)
As a reminder once again, in preparing a proxy statement, any omitted schedules must be reviewed with an eye toward determining and disclosing in the proxy statement and perhaps in the agreement itself any material exceptions contained in the schedule.
Here are links to the story as reported by the NYT and WSJ. The papers report that both the NY AG, Andrew M. Cuomo, and the House Committee on Government Oversight and Reform are also conducting investigations into the merger and related disclosures.