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October 23, 2009 5:56 PM

Wachtell Under Fire

Posted by Zach Lowe

Amid the piles and piles of formerly privileged documents related to the Bank of America-Merrill Lynch merger, there are a few notes and e-mails from mid-December 2008 showing that BofA's lawyers at Wachtell, Lipton, Rosen & Katz were saying very different things to their client and to federal regulators, according to this story just out from Corporate Counsel, an Am Law Daily sibling publication. 

Specifically: On Dec. 19, 2008, two weeks after shareholders approved the merger but a dozen days before closing, Wachtell litigation partner Eric Roth informed BofA that it would be very difficult, if not impossible, to get out of the deal. In an e-mail copied to several high-level partners, including top dealmaker Edward Herlihy, Roth warned BofA officials that a move to break the deal because of Merrill's ballooning fourth-quarter losses would result in a lawsuit from Merrill--one BofA would likely lose under the relevant precedent. 

But a few hours later, Roth told federal regulators during a conference call that he believed the bank could terminate the merger without a problem, according to Corporate Counsel's review of a separate chain of e-mails between top BofA in-house lawyers describing the conference call. This would seem to lend credence to the notion, originally floated here by Corporate Counsel, that BofA attempted to leverage a threat to break the deal into billions in government bailout aid. 

Roth did not respond to Corporate Counsel's request for comment.

How these revelations impact the various investigations of BofA's conduct regarding the Merrill merger is unclear. As you know by now, the Securities and Exchange Commission has filed suit against BofA, claiming the bank violated disclosure rules by failing to adequately inform shareholders about Merrill's plans to pay up to $5.8 billion in bonuses. The House Committee on Oversight and Government Reform and the New York attorney general's office are investigating similar allegations. Wachtell's advice during the merger talks is central to those investigations. In court filings, the SEC claims BofA executives declined to answer specific questions about the merger, citing attorney-client privilege and saying they relied completely on outside counsel. The bank ultimately decided to waive attorney-client privilege after a judge threw out its settlement with the SEC and under pressure from Congress and New York AG Andrew Cuomo.

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This may be nothing more than an example of excellent management:

WLRK managed BofA's expectations regarding the likelihood of successful litigation, which would have been highly unlikely, if we assume a somewhat general MAC clause was inserted into the agreement. Roth, then, was correct to advise BofA that a decision by the bank to drop the deal, under current jurisprudence surrounding MACs, would be, indeed, "very difficult, if not impossible" without incurring large losses (either via settlement or court ordered pay-outs).

On the other hand, Roth, as lawyer for BofA, would have been in his right and even duty-bound to inform regulators that technically BofA could terminate the merger without a problem. A lawyer looks out for the interests of his client. Here, BofA was Roth’s client and while it may not have made business sense to terminate the merger as of December 2008, that option was always available – though not a attractive one. So, at the end of the day the issue turns on our definition of “problem.”

Well, there you have it. The 2L has spoken. Matter resolved.

But, while I am not familiar enough with the facts of this case to say anyone was lying - as opposed to, let's say, spinning the facts - I always thought that a lawyer's duty to his or her clients stops somewhere short of lying to regulators.

Reminds me of AIG's assertion that its lawyers purportedly had advised it that it was bound to honor the bonus contracts. Perhaps that was true for some employees, but that assertion never seemed even possibly correct for employees who were knowingly making deals they knew AIG lacked capital to honor. Consider, for example, the Parmalat ruling in which Judge Kaplan invoked in pari delicto as the basis for refusing to allow recoveries by entities that were part of fraud. Assuming he is correct on the law, it seems that same rule would bar recoveries by AIG employees seeking bonuses for revenues generated from contracts AIG could not honor, etc.

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