Next Chapter In Rakoff – BofA – SEC Love Triangle Gets Interesting; Cuomo's Arrival Adds Another Vertex
Courtesy of Tyler Durden
With Judge Rakoff’s deadline for responses by the SEC and BofA on why the firms invoked a labyrinthine attorney-client privilege instead of explaining outright who the culpable parties were, about to pass, the two firms did not disappoint and both filed their relevant filings with Southern NY District Court (BofA response here, SEC response here).
The first and most blatantly amusing tidbit is the SEC’s claim that the penalty sought indirectly from US taxpayers to fund its operations is fair and equitable:
As in all enforcement actions involving public companies, the Commission strives to achieve an appropriate balance between the need for deterrence and the desire to avoid harming innocent shareholders [TD: or in this case presumably involuntary TARP funders, aka, taxpayers]. The proposed $33 million penalty in this case strikes that balance. The penalty will have a meaningful deterrent effect on a corporation’s future use of nonpublic documents to negate or qualify express disclosures that they make to investors. And it will achieve that effect without excessively burdening the shareholders of Bank of America.
Not even sure which sentence in the foregoing is the most asthma attack inducing, although the summary message that taxpayers are on the hook to pay up and make sure that Ken Lewis presumably does not go to prison, resounds loud and clear with anyone who would care to read the SEC’s flagrant abuse of its “regulatory” approach.
Even more hilarious is BofA’s retort, in which the firm mindbogglingly continues to plead for its innocence:
While the civil penalty agreed to in this settlement was indeed large – especially given the lack of merit of the SEC’s case – the settlement would not unfairly harm innocent shareholders and was determined by Bank of America for the reasons stated to be preferable to litigating the case.
For a firm so concerned about its “innocent” shareholders, BofA sure had no qualms about misleading them all, about $4 billion in undisclosed bonus payments to be received by the same captains of industry that bankrupted Merrill Lynch. As for the “SEC’s lack of merit”, hopefully Rakoff has half a brain to read between the lies in this doubly complicit game where nobody wants to point any fingers, and have taxpayers eat the penalty, so that no member of the executive committee ends up going in prison for securities fraud.
Yet where it gets most interesting is the core matter of the attorney-client privilege, which was the primary reason for Rakoff’s order on August 25. Let’s recall what the Judge said about the issue:
“This is puzzling. If the responsible officers of Bank of America, in sworn testimony to the SEC, all stated that “they relied entirely on counsel,” this would seem to be either a flat waiver of privilege or, if privilege is maintained, then entitled to no weight whatever, since the statement cannot be tested. In asserting that no waiver occurred, the SEC cites just one case, John Does Co. v. United States[,] which, on first reading at least seems hardly to support such a broad assertion applicable to the fact here.“
Here is the SEC’s retort:
Bank of America repeatedly has asserted the attorney-client privilege with respect to the production of documents and in regard to testimony or interview of witnesses in the course of the staff’s investigation. Bank of America has consistently declined to waive the privilege… The Commission cannot compel a party to waive the privilege if it declines to do so, nor does the Commission believe it has a sound legal basis here to seek a court order to compel a waiver. Under applicable Second Circuit precedent, the assertion by a party in an investigative setting that they have relied on counsel, or that they may have a defense based on such reliance, generally does not constitute a waiver of the attorney-client privilege.
Bank Of America elaborates on this “pass the potato” game, which persists in identifying not one relevant party:
In the August 25 Order, the Court also asked whether Bank of America had waived the attorney-client privilege by allegedly asserting that it relied on counsel. The answer is indisputably no for at least three reasons. First, no Bank of America or Merrill Lynch witnesses told the SEC that they relied on the advice of counsel with respect to the matter at issue here. At most, when asked, Bank of America and Merrill Lynch witnesses answered that they delegated to counsel the responsibility for preparing the Proxy Statement, including the section at issue here. Second, no Bank of America or Merrill Lynch witnesses revealed the content of any confidential communication with counsel. Third, neither Bank of America nor Merrill Lynch has ever invoked reliance on advice of counsel as a defense to a claim by the SEC in litigation.
So if BofA/Merrill expressly told the SEC they had never relied on counsel, why is the SEC making such a sticking point out the issue, and why is the attorney-client privilege being invoked in the first place? The relevant point is that none of these “defenses” have any pertinence to Rakoff’s angry outbursts:
If the SEC is right in this assertion, it would seem that all a corporate officer who has produced a false proxy statement need offer by way of defense is that he or she relied on counsel, and, if the company does not waive the privilege, the assertion will never be tested, and the culpability of both the corporate officer and the company counsel will remain beyond scrutiny.
This seems so at war with common sense that the Court will need to be shown more than a single, distinguishable case to be convinced that it is, indeed, the law. It also leaves open the question of whether, if it was actually the lawyers who made the decisions that resulted in a false proxy statement, they should be held legally responsible.
Alas, to Rakoff’s chagrin, the SEC holds firm in its assumption that this is purely a John Doe case law matter:
The Commission believes that John Doe Co. v. United States, 350 F. 3d 299 (2d Cir. 2003) is controlling here… Accordingly, when a party refuses to waive the attorney-client privilege, as Bank of America has done here, the Commission will give no weight to a possible advice of counsel defense in assessing the merits of the case or in making any particular charging decision… For the reasons set forth above, the Commission does not believe that the evidentiary record here supported individual charges or other charges against Bank Of America under the applicable legal standards, but that record firmly supports the proxy violation charged in the Commission’s complaint.
Let us paraphrase what a possible scenario may have been: way back when, the two stooges Hank and Ben, told Ken to do what he has to do or else. He proceeded to do so, afraid for his job and forfeiture of massive accrued comp. Subsequently a likely exchange occurred under which Ken was essentially given promises that no matter what, there would never be any legal actions taken against him, and that Mary would likely be “briefed” on this. As the events have ultimately come to a head, the “privilege” is the sticking point in preventing Ken or anyone else from becoming a fall guy. However, the risk here is that neither the BofA nor the SEC response go so far as the provide evidentiary materials which go to assuaging Rakoff’s concerns. And all this even before Andrew Cuomo got involved. Therefore, the next move by Rakoff will be very critical, as will the disclosure received by Cuomo which has a September 15th deadline. If it is basically the same two weak pieces of drivel that were submitted in SNY District Court, one should now start the over under on how many years of jailtime certain BofA executive committee members could be looking at.
| Attachment | Size |
|---|---|
| SEC Reply.pdf | 1.03 MB |
| BOFA Reply.pdf | 106.57 KB |
Email This Post
Facebook
Twitter
LinkedIn
del.icio.us
Digg