Justin Maxon/The New York Times
Justin Maxon/The New York TimesSDNY Judge Jed Rakoff (Swarthmore BA ’64, Oxford M.Phill ’66, Harvard JD ’69; appointed by Clinton in ’95) is none too pleased with Bank of America’s privilege claims in its defense of proxy-statement violations alleged by the SEC. The SEC claims the Bank didn’t disclose material information ($5.8 billion of bonus payments) in its proxy statement for the acquisition of Merrill Lynch.
The Bank and the SEC were all set to settle for $33 million, but Rakoff rejected the settlement in a scathing opinion.
He was particularly annoyed by the fact that the settlement payment would come out of the pockets of the victims of the fraud.
The SEC has been blaming the lawyers (Wachtell for Bank of America and Shearman for Merrill Lynch) for the disclosure strategy. Rakoff, whose biography includes turns in private practice, two years as an associate at Debevoise & Plimpton then partnership at Mudge Rose and Fried Frank, is out for lawyer blood.
After the jump, highlights of the opinion and the harsh words for counsel.
Frustrated by the SEC’s decision to go after the bank, which then, rightly, invoked privilege, Rakoff seems to really want the firms to pay the fine.
The S.E.C., while also conceding that its normal policy in such situations is to go after the company executives who were responsible for the lie, rather than innocent shareholders, says it cannot do so here because “[t]he uncontroverted evidence in 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? And why, in any event, does that justify imposing penalties on the victims of the lie, the shareholders?
He then goes on to mock the SEC’s decision to prosecute the Bank instead of the firms:
The S.E.C. states, as noted, that culpable intent was nonetheless lacking because the lawyers made all the relevant decisions. But, if so, then how can the lawyers be said to lack intent?
In footnote 3 he follows up with a roadmap for an investigation he seems to want done on the firms:
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 Bank, for its part, claims that it has not relied on a defense of advice of counsel and so no waiver has occurred. But, as noted earlier, the Bank has failed to provide its own particularized version of how the proxies came to be and how the key decisions as to what to include or exclude were made, so its claim of not relying on an advice of counsel is simply an evasion.
For all his wisdom, though, we wonder if Rakoff is a little out of touch on legal fees these days, because he found “quite aside from the fact that it is difficult to believe that litigating this simple case would cost anything like $33 million.” That’s a pretty steep bill, but considering the amount at stake and the number of parties and claims involved, we wouldn’t be surprised. Think about it, some firm (Cleary?) is going to have to represent the bank in a suits against its former firms, Wachtell and Shearman. They’re going to need counsel; and they’re probably going to claim indemnity from the banks anyway. Not to mention the hurdle of Stoneridge, so who would even be able to bring the claim?
It sounds like the $33 million the bank was willing to pay as nuisance value (which he also found offensive, because it was taxpayers’ money in the first place) is just the beginning. Rakoff says that was an inadequate amount for the settlement because it was a “trivial penalty for a false statement that materially infected a multi-billion-dollar merger.”
He wants the SEC and Bank of America ready for a February trial.
Do you think the SEC will get the hint and go after the firms directly? What’s the likelihood of being able to prove a case against them? Would they settle? Let us know what you think.
Related posts:
