Caught in the middle: Wachtell and the BofA/Merrill merger mess

By Alison Frankel
June 6, 2012

Former Bank of America CEO Kenneth Lewis has a simple argument for why he’s not liable to shareholders who claim they were defrauded into supporting BofA’s 2008 acquisition of Merrill Lynch: It’s the lawyers’ fault. In a summary judgment brief filed Sunday night in the shareholder class action, Lewis’s counsel at Debevoise & Plimpton asserted that as Merrill Lynch’s fourth-quarter projected losses ballooned from the $5 billion BofA had estimated in November to more than $10 billion by Dec. 3, Lewis asked BofA’s then-CFO, Joe Price, whether those losses had to be disclosed to shareholders. He was informed that the CFO had “consulted with legal counsel” and had concluded that interim projections didn’t need to be made public.

Lewis’s brief implies (but does not directly state) that Price had spoken not only to Bank of America’s general counsel at the time, Timothy Mayopoulos, but also to BofA’s outside lawyers at Wachtell, Lipton, Rosen & Katz. For Lewis, it doesn’t much matter who Price talked to — or even whether Price really received the legal advice he allegedly passed along to Lewis. What’s significant, according to the former CEO’s brief, is simply that Lewis had a good-faith reason to believe disclosure wasn’t warranted. Lewis didn’t even assert a formal advice-of-counsel defense but said his “understanding of what BAC’s CFO was told by counsel” is enough to rebut shareholder claims that he intended to mislead them.

But for Wachtell, professional integrity is at stake in the guidance it gave its longtime client in the run-up to the shareholder vote on the Merrill merger. Wachtell, after all, is one of the premier M&A law firms in the country. Its reputation would be sullied if it had offered the bank advice so misguided that BofA ended up the subject not only of regulatory inquiries by at least four state and federal agencies but also of a gargantuan shareholder suit.

Lewis’s brief aside, the bulk of the evidence in the shareholder case indicates that Wachtell did not, in fact, offer Bank of America any advice on disclosing Merrill’s escalating losses before the Dec. 5, 2008, vote by BofA shareholders on the Merrill merger. BofA CFO Price may have suggested to Lewis that he consulted Wachtell after Dec. 3, when BofA revised its estimate of Merrill losses by more than $5 billion: An enigmatic handwritten note by Price at the time implied that he intended to talk with Wachtell corporate partner Edward Herlihy about disclosure. Bank of America Vice-Chairman Gregory Curl also said in an April 2009 deposition in the New York Attorney General’s investigation of the Merrill merger that he had placed a call to Herlihy on Dec. 3 to discuss disclosure. Curl later recanted that testimony, according to a complaint filed by the New York attorney general against BofA, Lewis, and Price in 2010.

Herlihy testified in the AG case that he had no such discussion with Price or Curl. At least three other Wachtell partners have been deposed in the securities class action – corporate partner Nicholas Demmo and litigators Peter Hein and Eric Roth – and all have denied that Wachtell was consulted on disclosure after Bank of America’s initial analysis of Merrill’s losses in November 2008. BofA former general counsel Mayopoulos has repeatedly testified that he’s the one who advised Price on Dec. 3, 2008, that the bank didn’t need to inform shareholders of the revised Merrill loss estimate. (Mayopoulos has testified that he made that decision based on Price’s assertion that the new estimate was $7 billion in losses. He was allegedly not aware that the new projection was actually more than $10 billion. As Price’s counsel at Baker Botts conceded in Price’s new summary judgment motion, that’s a fact issue that will have to be decided at trial.)

The New York AG’s complaint took pains to exonerate Wachtell, arguing that Bank of America cut its outside lawyers out of disclosure decisions so it wouldn’t receive advice it didn’t want. Wachtell partners, according to the AG, had advocated for disclosure of Merrill losses in November 2008, when the $5 billion loss estimate was much less dire. Mayopoulos and other bank executives “disregarded” Wachtell’s advice, the AG complaint said. Then, when the loss projection escalated to more than $10 billion on Dec. 3, Wachtell was not informed. “The firm was never advised of any losses in excess of $5 billion until after the [shareholder] vote [on Dec. 5],” the AG contended.

Ironically, Bank of America’s defense in the shareholder litigation might be stronger if it could fob off responsibility for alleged disclosure failures on Wachtell. Instead, the bank has remained so tightly allied with the firm that Wachtell was initially BofA’s lead counsel in defending the class action, which dates back to 2009. Only in February – with its partners scheduled to be deposed by shareholders’ lawyers – did Wachtell inform the presiding judge, U.S. District Judge Kevin Castel of Manhattan, that it would not be trial counsel in the securities litigation. (Theodore Wells of Paul, Weiss, Rifkind, Wharton & Garrison will be lead counsel for the bank if the case goes to trial; Cleary Gottlieb Steen & Hamilton also represents BofA in the class action.)

Even now, Hein and Roth of Wachtell are listed as counsel on the bank’s most recent brief in the securities case, BofA’s summary judgment memo, filed on Sunday. That could get awkward, considering that the shareholders plan to use Wachtell memos to support their argument that the undisclosed Merrill Lynch losses were material. As I explained yesterday, shareholders got their hands on Wachtell documents because Bank of America partially waived attorney-client privilege to respond to U.S. Senior District Judge Jed Rakoff’s pointed questions in the Securities and Exchange Commission’s disclosure suit against the bank. Shareholders’ counsel – from Bernstein Litowitz Berger & Grossmann; Kaplan Fox & Kilsheimer; and Kessler Topaz Meltzer & Check – were then granted access to whatever Wachtell work product BofA turned over to regulators.

That material is now a centerpiece of the shareholders’ case. As plaintiffs’ lawyers detailed in the summary judgment motion they filed on Sunday, in mid-December 2008, after BofA shareholders approved the Merrill merger but Merrill’s mark-to-market losses continued to escalate, Bank of America executives asked Wachtell to analyze whether the bank could exercise the material adverse effects clause and walk away from the merger. Wachtell concluded it could. In a memo written on Dec. 20, 2008, the law firm discussed the devastating impact of the last-minute asset sales Merrill undertook to bring its balance sheet up to snuff for the merger. “Effect will be felt for the foreseeable future” was Wachtell’s assessment.

Wachtell also prepared a script for Lewis to follow when he called Merrill Lynch CEO John Thain to halt the merger. The script for a phone call Lewis never made called for the BofA CEO to recount the dates on which the bank learned of Merrill’s ever-increasing loss projections. Shareholders intend to argue that if Bank of America was so concerned about these projections, it had a duty to disclose the rising estimates to investors. (Financial historians should read the proposed Lewis script just to engage in the thought exercise of the shape Bank of America would be in if it hadn’t gone through with the Merrill merger, considering the crutch Merrill has provided the bank in the last few years.)

It’s a bizarre quirk of this litigation that the shareholders’ lawyers are likely to back Wachtell – their opposing counsel – when the plaintiffs file a response to Lewis’s summary judgment motion. The shareholders will say that Wachtell never advised Price on disclosing Merrill’s mounting losses, because that keeps Price, and potentially Lewis, on the hook. It also adds credibility to shareholder arguments that once Wachtell learned how bad Merrill’s books were, the lawyers constructed a case for calling off the deal. If this case actually goes to trial, and Wachtell partners Herlihy, Demmo, Hein and Roth are called to the witness stand – which is not outside the realm of possibility – they could well end up helping shareholders as much as their own clients.

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