The lawyer who talked too much – and lost the Fed privilege in AIG bailout suit

February 23, 2015

I don’t envy Judge Thomas Wheeler of the U.S. Court of Claims. Last week, the Justice Department and former AIG chief Maurice Greenberg filed hundreds of pages of post-trial briefs in Greenberg’s multibillion-dollar Fifth Amendment case, which alleges that the government engaged in an unconstitutional taking when it received about 80 percent of AIG’s equity in exchange for bailing the company out of a near-death liquidity crisis in 2008. Wheeler, who oversaw a six-week bench trial last fall, featuring testimony from officials who led the government’s response to the financial crisis, now has to wade through the two sides’ competing versions of both the facts and the law.

As the New York Times reported Friday, Greenberg’s 520-page brief on the factual record cites a handful of potentially momentous documents that were shielded by attorney-client privilege until the last days of the trial. Among them: a Sept. 17, 2008 email in which a partner at Davis Polk & Wardwell, which was advising the Federal Reserve Bank of New York, said that the Treasury Department has “no express authority” to acquire equity as a condition of making a loan and that the government “is on thin ice” in asserting that demand; an Oct. 28, 2008, email from New York Fed general counsel Thomas Baxter to Davis Polk partner Marshall Huebner in which Baxter said that the trustees of the AIG credit facility “should not care about the AIG minority shareholders”; and a Sept. 23, 2008, email from Huebner to Baxter, in which Huebner said the “real joy” of the government’s $85 billion loan to AIG “comes when we get back the $85, with $10 +++ in fees and interest and make the Treasury tens of billions it deserves (and needs!) on the equity.”

Greenberg’s lawyers at Boies Schiller & Flexner said in their brief that some of the once-privileged documents contradicted testimony of government witnesses on such core issues as whether the Treasury Department insisted on equity because it regarded AIG as a risky bet. Boies Schiller is clearly hoping that the emails from the time in question undercut after-the-fact testimony from Treasury and Fed officials.

If they do, the government has no one to blame but its own lawyers and witnesses. The privileged documents fell into Boies Schiller’s hands because the Justice Department put Davis Polk lawyers on the stand – and one of them talked too much.

During Huebner’s first day of testimony, David Boies asked him on cross-examination about a private shareholder suit in Delaware Chancery Court that had challenged the government’s conversion of AIG preferred shares into common shares. Huebner volunteered his view of Delaware law and said that he’d shared his opinion with the Fed.

Boies said Huebner’s disclosure – which was not a direct response to a question – was a waiver of privilege. The government, Boies argued, had been using privilege as both a sword and a shield, calling its lawyers as witnesses to justify its actions yet claiming privilege over documents reflecting their advice. Justice Department lawyer Matthew Scarlato objected on behalf of the government, arguing that Boies was permitted to ask Huebner questions based on the Davis Polk lawyer’s account of his work, but not to obtain additional discovery.

The following day, with Huebner still on the witness stand, Boies again asserted that Huebner had waived privilege by disclosing his legal advice to the Fed, this time under questioning by the government. And as the scope of Huebner’s disclosures widened, Boies said, the waiver should extend to more of the issues in the suit. The Justice Department continued to argue that Boies could ask Huebner whatever questions he wanted but that Greenberg wasn’t entitled to see privileged documents. Judge Wheeler was skeptical: “Well, it seems to me the way this witness has freely spoken about counseling advice given to his client, I’m not sure you can parse the waiver so finely anymore,” he said. “I think there’s maybe a waiver as to everything … by the way this witness has testified. He’s basically freely spoken about everything that he spoke to his client about.”

The judge made it official on Nov. 5, ruling from the bench that “the rules changed dramatically” because of Huebner’s testimony. He ordered the government to produce to Boies Schiller about 30,000 documents – not just Davis Polk documents but everything listed on its privilege log.

Justice and Boies Schiller fought after the trial ended about how many, if any, of the once-privileged documents should be admitted into the record. Judge Wheeler denied Greenberg’s initial motion to keep the record open, but in January, granted Boies Schiller permission to supplement the record with about 135 documents that had previously been shielded by privilege. According to him, Justice lawyers couldn’t have it both ways. When they “purposefully disclosed privileged information” in questions to Huebner and his Davis Polk partner John Brandow, they lost the right to bar Greenberg from making use of other privileged documents.

Will the Davis Polk communications make a difference in Judge Wheeler’s ultimate decision on Greenberg’s claim? They’re certainly just a tiny piece of the case, in which there are more than 1,000 exhibits. The trial record runs to almost 9,000 pages. The Justice Department chose not to challenge the documents’ admission in its post-trial proposed conclusions of law, which could mean that it isn’t particularly worried about them. It surely means that the once-privileged materials will be part of the record of the case when it goes up on appeal.

I’ll leave the last word on the documents to Huebner, an all-star restructuring lawyer who didn’t respond to my phone and email requests for comment. On the final day of Huebner’s testimony, Boies returned to the issue of Davis Polk’s counsel on that private shareholder suit. Huebner said he’d consulted with Davis Polk partner Martine Beamon, a former federal prosecutor with more expertise than he in analyzing a civil complaint.

“As we’ve all learned, quite painfully, I am not a litigator,” Huebner said.

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