In-house ACCess : In-house ACCess: Association of Corporate Counsel : ACC : The In-house Counsel Bar Association

I recall one day when I was first hired in-house and my boss came into my office upset with an opinion I had given. After he was finished reading me the riot act, I told him that he had a right to expect the very best opinion I could give, and he or other members of the management team could follow it or ignore it, that was up to them, but they did not have the right to tell me what that opinion was going to be.

Some years later, I was intransigent about a legal position we should take to represent the best interests of the shareholder. The business manager was resisting it because he felt the lawsuit would impact the price of future products in a manner that would adversely affect the way his performance was measured. He expressed considerable exasperation working with me, however, as he walked out the door he looked back and said, “Although I do not like working with you as a business colleague, if it was my money you would be the only person I would hire.”

I am sharing these experiences with you because this morning I was captivated by the House oversight hearings on the continuing saga of the Bank of America purchase of Merrill Lynch. What I had not known was that a Bank of America General Counsel was terminated for no reason apparently except that he had given advice that was contrary to the wishes of the CEO. His successor, although a lawyer, had not practiced for 10 years. He testified, as did every other member of the BofA Board on the panel, that he had the highest respect for his predecessor’s skill and capability, but that it did not occur to him to ask why he was abruptly fired in the middle of the BofA purchase of Merrill. Considerable skepticism was expressed concerning the candor of this testimony—and justly so, since a General Counsel who assumes a position in the context of a termination which appears questionable or improper is as guilty of the malfeasance as the perpetrator – he or she merely enables the malfeasance.

Your client is the company and its shareholders—not necessarily the person who holds your career in his hands. We need to remind those in our profession of that fact, and that their failure to adhere to the principle not only ultimately brings shame upon themselves, but also upon the profession.

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I am sure that most of you have some passing familiarity with the dispute surrounding the bonus compensation of Merrill executives just prior to its sale to Bank of America. The claim was that Merrill had intended to pay its executives 5.8 billion dollars, 12% of the purchase price that Bank of America agreed to pay for Merrill, and that Bank of America executives knew this fact and withheld it from shareholders in order to receive consent to the purchase.

Other than some passing knowledge of an SEC suit and some unflattering comments by media commentators concerning the fact that the court had failed to permit an agreed settlement, I knew very little until a friend sent me a copy of the Court’s opinion refusing to accept the settlement.

The first thing that strikes you about this is the style of the case—SEC v Bank of America.   I am no expert on SEC law but it was curious that the SEC would sue the Company for allegedly deceiving itself. A review of the opinion quickly reveals the simple logic for the judge’s decision—we should not be punishing the victims.

The complaint alleges that various officers of Bank of America knew of the bonus arrangement but failed to disclose it to obtain shareholder consent. The settlement the judge noted was to have Bank of America, ultimately the shareholders, pay a 33 million dollar fine for having been duped. Needless to say the judge found this resolution unsatisfactory.

What follows in the case is then a series of explanations of why the actual alleged offenders could not be liable. The executives were not responsible because they relied on the lawyers, the lawyers were not responsible—well you read it. It does contain much of the confusion and contradictions that one finds in a Gilbert and Sullivan Operetta, without perhaps the happy ending.

The most curious is the explanation of why having the shareholders pay 33 million for having been defrauded was actually in their interest.

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In a case involving an investigation by the NYAG and the SEC of Bank of America’s merger with Merrill Lynch and compensation and bonuses paid to Merrill Lynch executives (see New York Law Journal story), the NYAG's approach turns privilege law on its head and could profoundly undermine the provision of legal and preventive law counseling in public companies. 

The U.S. Department of Justice has officially agreed that coercing privilege waivers is not appropriate, without precedent, and extremely bad public policy.  It appears that the NYAG strategy is to "try" Bank of America in the media where they have suggested that Bank of America is not cooperating with the investigation because they haven't released privileged communications and work product. Such arguments do not hold water and would not withstand the scrutiny of introduction in the courtroom, under legal precedent on privilege, current federal charging policy, or SEC enforcement guideline.

It is ludicrous for the government to argue that a company invokes an "advice of counsel defense," because an employee “admits” under questioning that s/he spoke with a lawyer. That "admission" by the employee is the result of a good faith answer to a direct question posed by a prosecutor (and is thus compelled). It is not a disclosure of any aspect of the underlying advice, nor does it somehow create an argument that the company is asserting an advice of counsel defense.  We all know that such an assertion needs to be made by the company in a formal adjudication process as a stated defense.  Bank of America is quite clearly arguing in this case that its actions were legitimate and compliant with all disclosure laws, not that they were somehow illegitimate or suspect, and only made on “advice of counsel.”   (see Lewis Liman’s 9/8/09 letter to the NYAG). 

 
The NYAG's unprincipled shot across the bow [to create out of thin air an assertion that the company has raised an advice of counsel defense and therefore needs to divulge privileged files], if allowed to stand, will reverberate through every corporate boardroom and C-suite.  It will have a chilling effect on clients’ willingness to engage in crucial conversations with lawyers on the most sensitive and complex matters they face.  Yet those are precisely the circumstances in which the public interest most favors candid consultations with counsel.  I would have hoped that prosecutors and enforcement officials in such cases would be interested in encouraging such good practices, rather than undermining them.  

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