I. Introduction
The decision of Judge Jed Rakoff in the settlement agreement between Bank of America (“BofA”) and the Securities and Exchange Commission (“SEC”) is one that could strike fear in the hearts of corporate attorneys everywhere. On August 3, 2009, the SEC filed charges against the Bank of America Corporation for its lack of disclosure to its shareholders about bonuses paid to Merrill Lynch executives in the merger. [1]
The Bank of America/Merrill Lynch merger is a complicated web of litigation and investigation that has become multifaceted as time goes on. As stated by Pennsylvania law professor David Skeel, “It’s like a multiplayer chess game where each party is making different moves from a different strategic position and each party has a huge amount at stake.” [2]
While the SEC is investigating the lack of disclosure to BofA shareholders regarding the bonuses paid out to Merrill Lynch executives, Congress’ Committee on Oversight and Government Reform (“COGR”) and New York attorney general Andrew Cuomo are also investigating the surprise losses incurred by Merrill Lynch in regards to receiving bailout money from the federal government. [3] It has been noted by Edolphus Towns, chairman of the COGR that BofA is not allowed to rely on the attorney client privilege in dealing with Congress’ investigation. [4] The legal principle of attorney client privilege is only protected to the extent that the information stays between client and attorney. As stated in In re Grand Jury, even though the attorney client privilege has been on utmost importance, it must be guarded cautiously or else the privilege would be waived. [5] Would this mean that there would be a forced waiver of the attorney client privilege in regards to concurrent litigation and investigation by the SEC? If so, what does this mean for corporate lawyers?
This article will discuss the history of the merger between BofA and Merrill Lynch, the dismissal of a settlement offer between BofA and the SEC and the effect this will have on corporate attorneys and their communication and representation of their clients in the future.
II. Background on BofA/Merrill Lynch Merger
When forming the contract in a hasty manner, BofA and Merrill Lynch executives developed a joint proxy statement in order to obtain votes from shareholders regarding the merger. [6] In this statement, BofA stated that Merrill Lynch executives would not receive year-end bonuses or other incentives without the consent of BofA and its shareholders. [7] However, the two companies’ Board of Directors had already come to an agreement that Merrill executives would receive up to $5.8 billion in discretionary bonuses. [8] These bonuses were going to be paid regardless of the fact that Merrill Lynch had lost $27.6 billion that year. [9] The schedule appended to the merger agreement stated that Merrill Lynch executives would be paid bonuses, but those bonuses could not exceed a total of $5.8 billion. [10] This was obviously contrary to the provision within the merger agreement that Merrill Lynch would not pay its executives bonuses without the permission of BofA and its shareholders. [10] However, this appended Schedule was not disclosed to the shareholders for consideration before voting on the merger. [11]
III. The Settlement and its Downfall
On September 14, 2009, the SEC and BofA proposed a settlement agreement for $33 million which was subject to court approval. [12] However, court approval of this settlement was denied. [13] In a decision by Judge Jed Rakoff, the settlement was rejected and set to move to trial in February 2010. [14] The judge stated that this settlement was, “a contrivance designed to provide the SEC with the facade of enforcement and the management of the bank with a quick resolution to an embarrassing inquiry — all at the expense of the sole alleged victims, the shareholders.” [15] Judge Rakoff scolded the SEC and Bank of America because its settlement would not impose liability upon those at fault for the lack of disclosure itself. [16] The SEC, which usually does go after the executives who were responsible, stated that it was not able to do so in this case because the lawyers for BofA and Merrill were the drafters of the merger documents and made the decisions about disclosure and this information would be protected by the attorney client privilege. [17]
Judge Rakoff, in his order, made a statement that perked up the ears of corporate attorneys everywhere. He stated that, “…if that is the case, why are the penalties not then sought from the lawyers?” [18] The rejection of this settlement could greatly influence the decisions of corporate attorneys when dealing with corporations.
IV. The Effect of the BofA/Merrill Lynch Merger on the Attorney Client Privilege
The purpose of the attorney client privilege is to provide full, frank communication between attorney and client for complete and adequate legal representation for the client. [19] By forcing BofA to disregard the attorney client privilege, corporate lawyers could become defendants in this case or be investigated further to seek claims based on their professional ethics. [20] According to the Associations for Corporate Counsel, this would be an absurd precedent for other companies if BofA was forced to give up information regarding private legal advice. [21]
By setting such a precedent, corporate attorneys might be reluctant to have full, frank communication with their clients for fear that they will no longer be protected by the attorney client privilege if their company comes under investigation by Congress where the attorney client privilege will not hold up. In this case, BofA’s disclosure of such information to Congress is based on the amount of losses incurred by Merrill Lynch during the past year with regards to the acceptance of federal bailout money, while the SEC’s investigation is focused on whether shareholders were wronged by BofA’s lack of disclosure of executive compensation. [22] As stated before, in dealing with Congress, BofA’s employees are not able to invoke the attorney client privilege and would be forced to share information regarding the legal advice given by its corporate counsel. [23] In response, BofA would be forced to supply information that would normally be sheltered by the attorney client privilege in investigations by the SEC and New York attorney general Andrew Cuomo. This is due to its disclosure of such information to Congress in its investigation. [24]
In his order, Judge Rakoff states that the persons who really suffer from the settlement deal between the SEC and BofA would be the investors. [25] However, if allowed this precedent of forcing the company to disclose its private legal communications would also harm the shareholders. If corporate lawyers are not able to discuss private legal matters with its corporate clients for fear that they will be held liable for wrongdoing, the costs of corporate counsel will begin to skyrocket to account for the potential cost of litigation and settlements stemming from such conduct. This cost would be indirectly borne by the shareholders.
This would also cause corporate counsel to be fearful of providing legal assistance to a corporation regarding certain matters. Attorneys will fear that they will be held liable and would not be protected by the attorney client privilege. This would also be detrimental to the corporation and shareholders in that there would not be adequate legal representation based on full and accurate disclosure of all legal possibilities due to the lawyer’s fear of liability. As stated by Susan Hackett, senior vice president and general counsel for the Association of Corporate Counsel, corporate lawyers would be unable to do their job effectively if they did not trust that the company will protect materials covered by the attorney client privilege. [26] This policy is one that we should adhere to the fullest in order to protect the investors, corporation and the field of corporate law itself.
V. Conclusion
While expanding liability to more individuals may seem to be in the spirit of the SEC, such an expansion would greatly hinder the ability of corporate lawyers to best defend their clients. By forcing a corporation to waive its attorney client privilege, shareholders and the corporation itself suffers as a result. While initially, it may be in the best interest of the shareholders of the specific corporation in general, this breakdown in the attorney client privilege would set bad precedent and lead to a slippery slope of corporate attorney liability which would, in effect, deny the corporation sufficient legal counsel. The shareholders would also bear the effects of this policy in the rising rates of corporate attorneys due to fear of liability if the attorney client privilege does not stand. The attorney client privilege has, in the past, been balanced with competing interests, however, the interests in adequate legal counsel and protecting the field of corporate law greatly trump the policies set forth by forced waiver of this privilege. [27]
[1] Press Release, Securities and Exchange Commission, SEC Charges Bank of America for Failing to Disclose Merrill Lynch Bonus Payments, http://sec.gov/news/press/2009/2009-177.htm (August 3, 2009).
[2] Louise Story, Congress Aims to Force Bank of America to Give Details on Merrill, N.Y. Times, Sept. 21, 2009, available at http://www.nytimes.com/2009/09/21/business/21bank.html.
[3] Id.
[4] Id.
[5] In re Grand Jury, 475 F.3d 1299 (D.C. Cir. 2007).
[6] Plaintiff Compl., Sec. Exch. Comm’n v. Bank of America, No. Civ. 6829 (S.D.N.Y. August 23, 2009), available at http://www.sec.gov/litigation/complaints/2009/comp21164.pdf.
[7] Press Release, supra note 1.
[8] Id.
[9] Marcy Gordon, Bank of America Trial With SEC Coming, Huffington Post, Sept. 22, 2009, available at http://www.huffingtonpost.com/2009/09/22/bank-of-america-trial-wit_n_294437.html.
[10] Plaintiff Compl., Sec. Exch. Comm’n v. Bank of America, No. Civ. 6829 (S.D.N.Y. August 23, 2009), available at http://www.sec.gov/litigation/complaints/2009/comp21164.pdf.
[11] Press Release, supra note 1.
[12] Sec. Exch. Comm’n v. Bank of America, No. Civ. 6829 (S.D.N.Y. Sept. 14, 2009), available at http://online.wsj.com/public/resources/documents/bofaorder914.pdf.
[13] Zachary A. Goldfarb, Judge Says SEC Failed Investors, Washington Post, Sept. 15, 2009, available at http://www.washingtonpost.com/wpdyn/content/article/2009/09/14/AR2009091401671.html.
[14] Id.
[15] Loren Steffy, Judge Speaks Justice to Wall Street, Houston Chronicle, Sept. 18, 2009, available at http://www.chron.com/disp/story.mpl/business/steffy/6626409.html.
[16] Sec. Exch. Comm’n v. Bank of America, No. Civ. 6829 (S.D.N.Y. Sept. 14, 2009), available at http://online.wsj.com/public/resources/documents/bofaorder914.pdf.
[17] Id.
[18] Id.
[19] ABA Task Force Mission Statement, http://www.abanet.org/buslaw/attorneyclient/home.shtml (last visited Oct. 8, 2009).
[20] Nathan Koppel, Ashby Jones, and Amir Efrati, Law Firms Put in an Unfamiliar Spot, Wall St. J., Sept. 16, 2009.
[21] Story, supra note 2.
[22] Id.
[23] Letter from Edolpus Towns, Chairman, House Committee on Oversight and Government Reform, to Kenneth Lewis, Chief Executive Officer and President, Bank of America Corporation (September 18, 2009) http://www.huffingtonpost.com/2009/09/20/congress-aims-to-force-bo_n_292931.html.
[24] Story, supra note 2
[25] Sec. Exch. Comm’n v. Bank of America, No. Civ. 6829 (S.D.N.Y. Sept. 14, 2009), available at http://online.wsj.com/public/resources/documents/bofaorder914.pdf .
[26] Kimberly Atkins, AG Michael Mukasey: Attorney-client privilege policy may change, Lawyers USA, Feb. 25, 2008, http://www.allbusiness.com/government/government-bodies-offices/8896391-1.html.
[27] ABA Task Force Mission Statement, supra note 19.