The hot seat just got a little hotter for Wachtell Lipton Rosen & Katz in the Bank of America bonus disclosure drama. In a court filing Wednesday, the Securities and Exchange Commission maintained that Wachtell knowingly gave Bank of America bad advice about how it should disclose $5.8 billion in bonuses approved for Merrill Lynch employees.
By digging up some Wachtell publications from 2005 and 2007, the SEC argued that the firm’s lawyers were quite aware that companies should not bury material information in hidden schedules to securities filings, as BofA did with information about the Merrill Lynch bonuses. But Wachtell has provided to the Litigation Daily the fuller text of one of those publications that in fact shows that Wachtell was advising clients on purportedly valid ways to avoid disclosing this type of information.
The SEC’s filing was made in response to a request for more information by federal district court judge Jed Rakoff, who has resisted approving a $33 million settlement between the SEC and BofA over charges that the bank violated securities law by not disclosing the bonuses. In particular, he wanted more information about who made the disclosure decision. Despite its criticism of Wachtell, the SEC continued to defend the reasonableness of this settlement, which Judge Rakoff has suggested is too low.
In this most recent filing, the SEC continued to dodge the question of who was responsible for the disclosure decision and refused to identify anyone at fault at BofA. But it had no problem heaping blame on Wachtell. The agency brandished excerpts from two publications by Wachtell partners informing clients about a 2005 SEC report in which the agency stated that companies should not hide certain material information in nonpublic “disclosure schedules.” BofA had previously argued in court filings that this practice is common in the M&A world.
In March 2005 the SEC issued a report emphasizing that, in contrast to standard procedure in many mergers, companies need to disclose any material facts that might contradict a representation made in a public filing. This issue arose in a merger involving the Titan Corporation, where a company hid in a disclosure schedule the fact that it faced potential Foreign Corrupt Practice Act charges.
In its brief, the SEC notes that in a 2005 Practicing Law Institute publication, Wachtell partner Patricia Vlahakas warns that the practice of excluding information contained in nonpublic disclosure schedules could violate securities laws. Shearman & Sterling, which represented Merrill, gave a similar warning in a 2005 client publication, which the SEC cited.
The SEC also cites a 2007 Wachtell publication written by Edward Herlihy, the lead lawyer for BofA in the Merrill deal. In a PLI publication that reviewed leading M&A developments for 2007, Herlihy wrote: “The SEC’s [2005 report] relating to Titan Corporation cautions a careful approach [to disclosure].” But Herlihy’s full written discussion, provided by Wachtell, shows that this “careful approach” doesn’t involve more disclosure. In fact, Herlihy suggests ways to get around the SEC’s Titan policy without disclosing the sort of details that companies want to keep out of sight. One suggestion, which BofA followed, is that companies state in their proxy that a merger agreement is “not intended to be a source of factual information.”
Despite its disparagement of Wachtell, the SEC noted in a footnote that “Bank of America’s counsel could not be charged with primary violations [of securities law] because they did not solicit the proxies in their name.”
We were not able to reach Herlihy for comment.
BofA, in its filing Wednesday by Lewis Liman of Cleary Gottlieb Steen & Hamilton, mostly repeated the arguments it made in its earlier brief, primarily that BofA’s proxy statement to shareholders was not misleading. It distinguishes the Titan case as a situation where the proxy statement made representations that were unqualified. Here, the bank argues, its representation that Merrill would not pay bonuses without BofA’s consent was limited by qualifying language: “except as set forth in…the disclosure schedule.” (That disclosure schedule was kept secret from shareholders.) “There is thus no way that a reasonable shareholder could have taken the Proxy Statement to mean that no incentive compensation would be awarded at Merrill Lynch,” the bank argues. “The Proxy Statement warned shareholders that representations made in the Merger Agreement ‘may be subject to important qualifications agreed to by the parties to allocate risk between Bank of America and Merrill Lynch.'”
In an August hearing, Judge Rakoff pressed the SEC lawyers to explain why BofA had not waived the attorney-client privilege when numerous bank executives said in interviews that they had relied on the advice of counsel to make disclosure decisions. In Wednesday’s brief the SEC responded that these assertions did not lead to the waiver of the privilege because they occurred during an investigation, not a judicial proceeding. Under Second Circuit law, the SEC argued, “Assertions of reliance on counsel during the investigative process generally do not result in a forfeiture of the privilege.” BofA stressed in its brief that it has not invoked an advice of counsel defense.
Separately, Liman wrote a testy letter Wednesday to the office of New York attorney general Andrew Cuomo, responding to its criticism that BofA was relying on an “indiscriminate” use of the attorney-client privilege to impede the investigation into the BofA-Merrill merger.