Oh, the ironies of megabillion-dollar securities class action litigation!
Last Friday, shareholders filed their response to summary judgment motions by Bank of America and its executives in a class action claiming BofA failed to tell shareholders about Merrill Lynch’s escalating losses and sky-high executive bonuses before BofA bought Merrill in 2008. As you would expect, the shareholders and their lawyers at Bernstein Litowitz Berger & Grossmann, Kaplan Fox & Kilsheimer and Kessler Topaz Meltzer & Check spend considerable time rebutting defense arguments that, as a matter of law, shareholders weren’t injured by BofA’s alleged disclosure lapses. Those arguments, the plaintiffs’ lawyers said, have already been rejected in U.S. District Judge Kevin Castel‘s class certification decision in February.
But deep in the 115-page filing is a more intriguing discussion of the role BofA’s lawyers at Wachtell, Lipton, Rosen & Katz played in the bank’s disclosure decisions. You may recall that former CEO Kenneth Lewis said he is entitled to summary judgment in the case because he relied on his CFO’s assurances that he’d consulted BofA lawyers on disclosure, and they’d said shareholders didn’t need to be told of interim Merrill loss projections that dwarfed initial reports. Lewis’s lawyers at Debevoise & Plimpton implied that the former CEO was under the impression that his CFO, Joe Price, had spoken both to the bank’s then-GC, Timothy Mayopoulos, and to BofA’s deal counsel at Wachtell.
The shareholders’ opposition brief demolishes that implication. “The record … establishes that BoA excluded Wachtell from the disclosure analysis at the critical time in the weeks before the [shareholder] vote,” the brief said. “Wachtell’s senior partners have uniformly testified that they were not informed of Merrill’s key December 3 loss estimate prior to the vote, and that Wachtell was not consulted at all on the issue of disclosure after November 20. Indeed, Wachtell did not learn of the magnitude of Merrill’s losses until December 12, when BoA contacted Wachtell one week after the vote to terminate the transaction because of Merrill’s losses.”
The shareholders cite what appears to be a dispute between Price and Lewis about what exactly the CFO told the CEO. According to the brief, Lewis testified at a deposition that Price told him he had consulted Wachtell senior partner Edward Herlihy once BofA learned that Merrill’s loss projections for the final quarter of 2008 had ballooned to $14 billion. Lewis said Price informed him that Herlihy didn’t think disclosure was necessary. The former CEO also said he was relieved to hear of Herlihy’s involvement and advice, according to the shareholders’ brief. Price, however, testified that he never spoke with Herlihy or any other Wachtell partner in the crucial time frame of early December 2008, and that he never told Lewis he did. (The shareholders’ filing noted that Wachtell partners deposed in the case have uniformly denied that they were consulted on the escalating loss estimates until after the vote.)
What’s the irony? Wachtell is Bank of America’s longtime deal counsel. Herlihy was Lewis’s trusted adviser as the BofA CEO turned the bank into a behemoth in the 1990s. BofA was, and is, so reliant on Wachtell that the firm was the bank’s counsel of record in this securities class action for a long time after U.S. Senior District Judge Jed Rakoff began questioning Wachtell’s disclosure advice in the Securities and Exchange Commission’s case against BofA. Yet when Lewis began pointing fingers, he attempted to shift the blame for disclosure failures to his old lawyers, via Price.
And, meanwhile, it’s Bank of America’s accusers, first the New York attorney general and now the shareholders, who have stepped in to defend Wachtell, asserting that bank executives didn’t consult their lawyers when they decided to keep shareholders in the dark.
Of course, the shareholders have their own motives for protecting Wachtell’s reputation. They want to keep Lewis in the case as a defendant, so it’s to their benefit to undermine his argument that he had a good-faith reason to believe shareholders received adequate disclosures. Wachtell isn’t a defendant in the securities case, so plaintiffs lose nothing by arguing that BofA’s lawyers knew as little as shareholders about Merrill’s looming losses.
Believe it or not, even though several of its partners have been deposed in the case and could conceivably be witnesses if it goes to trial, Wachtell remains one of BofA’s counsel in the case. Though it informed Castel in February that it will not serve as BofA’s trial counsel – that’s up to Paul, Weiss, Rifkind, Wharton & Garrison – Wachtell is still signing the bank’s briefs.
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