BofA Agrees To Waive Privilege In SEC Case

By Christie Smythe

Law360, New York (October 13, 2009) -- Bank of America Corp. has agreed to waive attorney-client privilege in the U.S. Securities and Exchange Commission's case over alleged misrepresentations in the bank's acquisition of Merrill Lynch & Co. Inc., potentially exposing individual executives and law firms involved in the deal to the agency's scrutiny.

The SEC issued an announcement Tuesday stating that, if approved by a judge overseeing the case, the agreement would result in a broad waiver of the privileges the bank has cited in remaining silent on details about how disclosures to shareholders were composed in connection with the $50 billion merger deal struck in September 2008.

The bank has come under fire from the SEC, New York Attorney General Andrew Cuomo, investors and others for its handling of the deal, in which Bank of America purportedly failed to provide key details to shareholders — including authorization of up to $5.8 billion in bonuses for Merrill employees and the full extent of Merrill's record $27.6 billion loss in 2008.

By waiving privilege, the bank would be in a position to reveal documents and other information detailing its role and the role of lawyers, including those from the firms Wachtell Lipton Rosen & Katz and Shearman & Sterling LLP, in deciding what information to provide in proxy statements and other documents.

"In particular, the order negotiated by the SEC would allow us to assess further details surrounding the bank's failure to disclose to its shareholders critical information concerning the award of bonuses to Merrill employees, including any relevant information previously withheld based on attorney-client or other privileges," SEC spokesman John Heine said in an e-mailed statement.

Additionally, the order would allow the agency to investigate previously privileged details regarding Merrill's financial results, Bank of America's decision not to invoke a material adverse change clause in its merger agreement — potentially allowing it to back out of the deal — when the investment bank's losses came to light, and Bank of America's communications with federal officials regarding financial assistance in connection with the merger, Heine said.

Any information revealed as a result of the privilege waiver could also be passed along to other government authorities investigating matters pertaining the merger, including federal and state regulators, the SEC spokesman said.

A representative from Wachtell, which represented Bank of America in the merger, did not respond to requests for comment Tuesday. Meanwhile, a representative from Shearman, which represented Merrill, declined to comment.

Bank of America spokesman Larry DiRita said that "given the pressure in multiple inquiries to provide additional insight, we've decided to waive it in this matter to get the issue behind us."

"We've got nothing to hide," he said, adding that the bank is certain it has handled the merger appropriately.

The heat has been turned up on the SEC in its action against the bank after Southern District of New York Judge Jed Rakoff rejected the agency's proposed $33 million settlement over the bonus disclosures, criticizing the agency for not targeting individuals who were involved in the companies’ merger, and questioning management’s apparent outsourcing of disclosure determinations to legal professionals.

“The SEC states, as noted, that culpable intent was nonetheless lacking because the lawyers made all the relevant decisions,” Judge Rakoff said in the Sept. 14 opinion, referring to the agency’s reasoning for not pursuing claims against individuals. “But, if so, then how can the lawyers be said to lack intent?”

Although experts have told the court that the merger disclosures were handled according to standard procedure, and the bank has maintained that it did nothing wrong in connection with soliciting shareholder approval, some legal analysts have said that the waiver of privilege could help turn the law firms involved in the deal into targets for SEC and other regulatory investigations.

The SEC litigation in the U.S. District Court for the Southern District of New York is far from the only legal entanglement involving the controversial merger, which some observers have said was pushed along by federal authorities.

On Monday, a judge in the Delaware Court of Chancery refused to throw out a lawsuit filed by shareholders against outgoing Bank of America Corp. CEO Kenneth Lewis and the company's board of directors over alleged failure to warn shareholders about Merrill's 2008 losses before the vote on the acquisition.

Last month, New York Attorney General Andrew Cuomo subpoenaed five members of Bank of America's board as part of its investigation into the Merrill acquisition, the Associated Press reported.

The U.S. Department of Justice and the FBI in Charlotte, N.C., are also reportedly conducting their own investigation of the merger, the Charlotte Observer reported, citing a "knowledgeable source."

BofA is represented by Cleary Gottlieb Steen & Hamilton LLP in the SEC case. Paul Weiss Rifkind Wharton & Garrison LLP has also joined in representing the bank.

The case is U.S. Securities and Exchange Commission v. Bank of America Corp., case number 09-cv-06829, in the U.S. District Court for the Southern District of New York.

--Additional reporting by Evan Weinberger, Allison Grande and Tina Peng