UPDATE THREE of THREE: BofA and SEC briefs submitted to Rakoff

Late last month, Judge Rakoff of the S.D.N.Y. requested additional briefs from the SEC and BofA, detailing outside counsel’s involvement in structuring the Merrill merger. I have tried to follow the issue on this blawg (Ie., here). AmLaw Litigation Daily reported the briefs came in this week.

The BofA brief stuck to what is now a familiar chorus: BofA did nothing wrong because the proxy statement issued to shareholders was not handled negligently and did not contain any misleading statements or omissions. In support of this, BofA maintains the proxy statement contained both language that alerted shareholders of impending incentive pay, and that qualified the proxy statement terms regarding compensation. BofA’s brief is thorough to list, inter alia: the language qualifying the proxy statement by an other “disclosure schedule” (not publicly disclosed), language allowing exception to proxy statement terms via BofA consent, language incorporating various financial disclosures and public references to unabated Merrill Lynch compensation (such as financial statements or BofA management discussion on earnings calls), as well as a number of contemporaneous media reports that disclosed to the investing public year-end Merrill Lynch compensation to be paid. Interestingly, the brief closes with two short but common-sense defenses. First, in light of the Wall St. compensation culture, it would be illogical for Merrill Lynch to not pay year-end compensation. And second, the proxy statement was a tool to solicit shareholder approval for a merger that was based on “strategic desirability of [the] business combination” of two entities. To the extent that compensation was relevant, it was only as a means of retaining the “human capital” that constituted Merrill’s value.

The SEC brief found a new bone, however …

Discussion about the SEC brief and the privilege issue after the jump.


The SEC brief maintained that shareholders should be able rely on direct representations in a proxy statement so as to cast an informed vote, and not have the burden of stringing together “material information from a variety of external sources.” Further, the SEC found unpersuasive BofA’s reliance on “standard transactional practice” (as regards the use of the now infamous “disclosure schedule”). The SEC relied on practice area publications produced by the various outside counsel on behalf of their firms, in response to 2005 SEC guidance counseling against using nonpublic schedules in merger agreements. The SEC maintains counsel used these publications to advise their own clients not to use such nonpublic schedules. Outside counsel responded to AmLaw Litigation Daily, however, suggesting the publications are in fact a guide how clients can circumvent the 2005 SEC guidance. Separately, the SEC maintains that the proxy statements contain misstatements, and that the incorporated financial statements and references are not clear that incentive pay would be paid. Further, the SEC labels the contemporaneous media reports of incentive pay as “speculative” and sporadic. The government does make an interesting and entertaining quip, however: that BofA maintains a reasonable investor would have connected all the dots and would have known incentive pay was forthcoming; ironic, then, that this reasonable investor cannot be trusted with that information directly, so that a “disclosure schedule” detailing the incentive pay was necessary in the first place.

And what about the issue of Privilege? The case sparked a blawgging furor in August over the suggestion attorney-client privilege was waived. The SEC killed the matter, however, signaling that Second Circuit precedent holds asserting reliance of counsel constitutes forfeiture of privilege only during judicial proceedings and not during investigative processes (what does federal precedent suggest regarding Andrew Cuomo’s most recent state law escapade?). Other circuit courts are on the same page.

Bottomline: both parties encouraged the Court to approve the $33 million settlement as a fair and reasonable resolution. The next move is Rakoff’s.

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