Is The SEC Setting Up Wachtell's Ed Herlihy As Ken Lewis' Fall Guy?
A closer read of the SEC response to Judge Rakoff reveals some nuances that indicate the SEC could be positioning to throw lawyers from Wachtell, Lipton, Rosen and Katz and specifically partner Ed Herlihy at the wolves, presumably to spare the "chosen one" Ken Lewis from a fate that could potentially include jail time.
The issue can be framed roughly as follows: in the Merrill proxy filed by BofA, there was reference to a disclosure schedule which contained additional bonus information, which however had not been included in the publicly distributed proxy and was thus considered material non-public information, and is at the crux of the SEC settlement. Now BofA had consistently argued that this practice of excluding disclosure schedules has been common in M&A transactions, yet the SEC issued a markedly different opinion on this issue. What was key, however, is that the SEC highlighted publications by none other than BofA lawyer in the Merrill matter, Wachtell Lipton, which emphasize the point that companies should not hide material information to proxy filings, and was, in other words aware, that by encouraging BofA to conduct such an action in the Merrill transaction, it was explicitly going against its own recommendations. This issue had appeared initially in the context of Titan Corporation, which hid, in its own non-filed disclosure schedule, material information that it had faced a Foreign Corrupt Practice Act charge.
And here is where the SEC sinks its teeth into the Wachtell angle:
The Titan 21(a) Report was well known in the M&A community and its unambiguous message was the subject of numerous panel discussions, practice newsletters and similar publications authored by attorneys at the two law firms that represented Bank of America and Merrill in their merger.
The SEC proceeds to quote Wachtell lawyer Patricia Vlahakis:
"SEC warns that the standard practice of attaching a merger agreement to a proxy statement where the merger agreement contains representations that on their face are inconsistent with underlying facts could create potential Section 14(a) and Rule 14a-9 liability or even Section 10(b) and Rule 10b-5 liability." - Read securities fraud - "It has long been standard practice to include a copy of the merger agreement as an annex to the proxy statement that is mailed to shareholders in the context of a pending merger transaction, but to exclude the disclosure schedules that modify the representations made in the merger agreement."
And the SEC proceeds to go to the very top, by quoting none other than Wachtell top dog Ed Herlihy:
"The SEC's Section 21(a) report of investigation issued in 2005 relating to Titan Corporation cautions a careful approach."
The SEC does not stop with BofA's counsel, but attacks Merrill's own legal team headed by law firm Shearman and Sterling, by quoting a March 17, 2005 S&S Client Publication:
Issuers should recognize that when they publicly describe or disclose material contractual representations, they must also disclose any other information - such as material facts contradicting or qualifying the representation - necessary to make the disclosure not misleading. In particular, issuers should note that the SEC has warned that general disclaimers...may not be sufficient where an issuer has material information contradictory to representations it has made...[I]ssuers should be sensitive to the SEC's heightened focus on this topic.
The SEC concludes: "Bank of America's disclosures in the proxy statement were clearly misleading, and in light of the principles laid out in the Titan 21(a) Report and upheld in Glazer, the decision not to disclose the agreement allowing the bonus payments was improper and incorrect."
And this is where the trap is sprung, because if Cuomo really wants a head on the mantelpiece, the SEC has left the loophole that allows the AG to go after none other, than the two firms' legal advisors: after all they expressly warned against the kind of activity that they endorsed and permitted in the BAC-MER transaction. The upside: with this minor scapegoat, Ken goes away scott-free, just as the overlords had promised. Yet even this loophole will be a tough one to follow: from a footnote in the SEC filing: "Bank of America counsel could not be charged with primary violation [of securities law] because they did not solicit the proxies in their name."
So end result: many wrongdoers, even more fingerpointing, but, in this particular case of prisoners' dilemma, nobody is willing to rat the other guy out. The biggest irony, of course, is that all are likely equally guilty of attempting to defraud the American taxpayer, who now only has Judge Rakoff as the last bastion of defense before this case is settled and promptly forgotten, while the thieves in high places continue their song and dance. One thing is certain: there will be no cards exchanged this holiday season between Ed Herlihy, Ken Lewis and Mary Schapiro.