BofA Privilege Waiver Approved In SEC Case

By Elaine Meyer

Law360, New York (October 15, 2009) -- A federal judge has approved Bank of America NA's agreement to waive attorney-client privilege in the U.S. Securities and Exchange Commission's suit over alleged misrepresentations the bank made in its acquisition of Merrill Lynch & Co. Inc., exposing individual executives and law firms involved in the deal to scrutiny over executive bonuses.

Judge Jed S. Rakoff of the U.S. District Court for the Southern District of New York on Wednesday approved the stipulation agreement and proposed protective order, which will allow Bank of America to waive attorney-client privilege for categories of information that are relevant to the SEC case without waiving privilege for the same information that could be of interest in related private lawsuits.

However, Judge Rakoff noted that "the protective order in no way precludes any party in this or any other case from challenging on any other ground Bank of America's assertion of attorney-client privilege or work product protection regarding any information."

The agreement, which the SEC announced Tuesday, would provide a broad waiver of the privileges the bank invoked in order to remain silent about how it disclosed information to shareholders regarding the $50 billion merger deal it struck in September 2008.

In particular the order would allow the SEC to assess further details surrounding the bank's alleged failure to disclose information concerning the awarding of bonuses to Merrill employees, the agency said.

BofA has come under fire from the SEC, New York Attorney General Andrew Cuomo, investors and others for its handling of the deal, in which it 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 is 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.

Additionally, the order would allow the agency to investigate previously privileged details regarding Merrill's financial results, BofA's decision not to invoke a material adverse change clause in its merger agreement — which could have allowed it to back out of the deal — when the investment bank's losses came to light, and BofA's communications with federal officials regarding financial assistance in connection with the merger, according to SEC spokesman John Heine.

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

BofA spokesman Larry DiRita said Wednesday 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 following Judge Rakoff's rejection of the agency's proposed $33 million settlement over the bonus disclosures. In that ruling the judge criticized the agency for not targeting individuals who were involved in the companies’ merger and questioned 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 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 Southern District of New York is far from the only legal entanglement over the controversial merger, which some observers have said was pushed along by federal authorities.

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

Last month Cuomo subpoenaed five members of BofA's board as part of its investigation into the Merrill acquisition, the Associated Press reported.

Representatives and attorneys for BofA and the SEC did not immediately respond to requests for comment Thursday.

The U.S. Department of Justice and the FBI in Charlotte, N.C., also are 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 Christie Smythe, Evan Weinberger, Allison Grande and Tina Peng