Monday's developments in the Bank of America-Merrill Lynch bonus case were so interesting that we decided to take a second look. Specifically, we wanted to know two things: First, was it a smart move for BofA's lawyers at Cleary Gottlieb Steen & Hamilton to hire -- at $1,090 per hour
-- Morton Pierce, chair of M&A at Dewey & LeBoeuf, and ask him to defend how BofA and Merrill disclosed the bonus payments in their merger agreement? And second, how close did BofA come to waiving attorney-client privilege in asserting -- to the Securities and Exchange Commission -- that the two banks relied completely on their outside counsel at Wachtell, Lipton, Rosen & Katz and Shearman & Sterling in drafting the relevant clauses in the merger agreement?
To recap: The SEC charged Bank of America this month with failing to adequately disclose that it would allow Merrill to pay $3.6 billion in employee bonuses even though Merrill would bring billions more in losses with it when the banks merged last September. But the SEC simultaneously agreed to drop those charges if BofA forked over $33 million in fines. Judge Jed Rakoff of U.S. District Court in Manhattan put the brakes on the settlement, saying it might be against the public interest. He wanted more information.
On Monday, he got it in the form of two wildly different filings, one from the SEC and one from BofA. Let's start with the latter, which included an affidavit from Pierce in which he claimed the banks handled the bonus disclosure exactly as most major companies would have in their public merger documents. In essence, the banks promised in the public merger agreement not to pay any bonuses, with the exception of any bonuses outlined in a confidential disclosure statement attached to the merger agreement, according to this comprehensive piece by the Deal Professor in The New York Times. The SEC argues that the disclosure statement is a direct contradiction of the merger agreement, and thus rises to the level of a violation, according to the NYT.
The banks disagree, and Pierce backed them up in an affidavit, arguing that merging companies typically hide sensitive information (such as bonus compensation) in non-public disclosure statements. By referencing those disclosure statements in the merger agreement and elsewhere, Pierce says companies signal stockholders that there is pertinent information beyond the public documents. It's standard practice, he says, and the Deal Professor agrees.
Of interest to us: Pierce discloses that BofA paid him $1,090 per hour for his work as an expert in the case, and that Dewey has earned more than $10 million in fees from Merrill and BofA since 2007, according to our colleagues at The Am Law Litigation Daily.
Experts tell us there is nothing wrong, ethically, with the banks hiring Pierce despite these apparent conflicts precisely because he disclosed them. "It would be a story if he didn't disclose them," says Lawrence Fox, a partner at Drinker Biddle & Reath who specializes in professional responsibility and has testified as an expert himself dozens of times. "It's not an ethical issue," says Stephen Gillers, an ethics expert and professor at New York University School of Law. "It's a strategic issue. It's up to the bank's lawyers to decide if [Rakoff] will believe Pierce's credibility is weakened" by the relationship between Dewey and the banks. Gillers adds that it would be difficult, if not impossible, to find a corporate lawyer whose firm hadn't reaped some fees from BofA and Merrill since 2007.
We called Pierce, who told us he can't remember ever being asked to submit an affidavit as a corporate law expert before. "It's unusual," he says. "But these are unusual circumstances." Pierce says Cleary's legal team called him and outlined what they were looking for, and that he was comfortable providing it. "If I didn't think I could do it, I wouldn't do it," Pierce says. As for the payments, Pierce adds: "Experts are paid for expert testimony. That is not an issue."
Let's turn briefly to the SEC filing, in which the agency argues that BofA failed to adequately inform shareholders and places the blame squarely on Wachtell and Shearman for crafting the merger agreement the way they did. That makes it clear that the banks have likely waived attorney-client privilege in their dealings with the SEC, according to Gillers and Susan Martyn, a legal ethics expert at the University of Toledo College of Law. The SEC, if they wanted to, could get its hands on all sorts of communications between the banks and their law firms, Gillers says.
But the SEC isn't BofA's opponent in this case. The agency, like the banks, wants Rakoff to approve the settlement. The banks have no traditional litigation opponent here. The closest thing to one might be Rakoff himself, according to Gillers, Martyn and others we talked to. And the judge seems interested in getting his hands on all available information about the bonus payments. So what if Rakoff pushed the issue by arguing that the waiver the banks presumably granted the SEC extends to him -- even though the banks did not rely on the advice of counsel defense in their fling with him? (Only the SEC raised that issue directly.)
"What's interesting here is whether Rakoff can say that he stands in the shoes of the SEC and that the privilege waiver carries over to him," Gillers says. "One view would have it that [the banks] waived privilege before Judge Rakoff, even if they don't rely on the advice of counsel defense before him. If I had to bet, I'd say that that view has a good chance to prevail if Rakoff presses the issue."
Says Fox of Drinker Biddle: "It is a very interesting question, and I don't know the answer."
Martyn believes BofA and the SEC crafted their filings in such a way that Rakoff would have to push very, very hard to find that BofA waived attorney-client privilege in his courtroom. The two sides are hoping Rakoff will accept the settlement before digging any deeper into the privilege issue, she says. "The bank is clearly trying to settle without formally saying they relied on the advice of counsel," Martyn says.
Rakoff could force the issue by ordering further hearings or plowing all the way to a trial, Martyn says. "It will be interesting to watch," Gillers says.
This article first appeared on The Am Law Daily blog on AmericanLawyer.com.