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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.
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this analysis complicates the matter a bit.
I do not believe the judge would have gone this far for lack of reason. Someone got badly hurt in this affair. And until that person is made whole, it will go on.
Throw lawyers under a bus. I have got to see this.
Tyler,
See if you can get a copy of the long client advert memo Herlihy did last year, basically advocating Treasury to keep shoveling money into the banks. He did that in addition to the various client advert memos you posted telling the SEC to shut down short sellers by bringing back an up-tick rule on speedballs and worse.
That is so fun and creative... the lawyers are just a culpable because they went along with the entire charade and they knew it was wrong... so if you can't get Ken Lewis then they are the next best thing...
Ned Zeppelin said it best on the previous thread.
This decision of necessity exists outside the "Cone of Silence", so Rakoff is right in asking, "who made the call?" I assume the officers signed the securities filing would be prima facie accountable and cannot shed their liability. If their lawyer's advice was bad, well they have a malpractice action they can file from prison, but it does not affect their personal liability.
The SEC can attempt to work counsel over for this one all they want. Judge Rakoff is smart enough to understand who has the power to make key decisions at a firm like BofA which is why the firm has a CEO and a board. If BofA's counsel was also serving as CEO then the SEC's bucket wouldn't have such a big hole in it.
That and, in a more pragmatic approach, the Judge is a lawyer himself... In general, lawyers are the last to be reprimanded... he's looking at BoA and the SEC first, lawyers a distant second.
Could this be bad for Goldman Sacks?
Plunging Prices at the Chicago Climate Exchange
http://tomnelson.blogspot.com/2009/09/plunging-prices-at-chicago-climate.html
Aha ha ha... there go the Christmas bonuses.
Nothing is bad for GS except maybe a computer outage.
Today is day 200 and 711 for no sunspots. No sunspots for GS till they learn a lesson they will never forget.
Sunspot number: 0
What is the sunspot number?
Updated 08 Sept 2009
Spotless Days
Current Stretch: 7 days
2009 total: 200 days (79%)
Since 2004: 711 days
Typical Solar Min: 485 day
http://www.spaceweather.com/
Michael... the stretch is actually much longer than that. Probably 65 days or so. They count plage region specks as sunspots to break the streches. Never would have happened 100 years ago. We are probably going into a Maunder minimum here.
This is big news that no-one is really following and the implications as you know may become dire. Have you seen the Ap geomagnetic index lately? It's fallen of the charts...
To the Devil's adovate, you play with fire you get burned...
Looks like the Devils are out to burn their advocates...
This shit reminds me of Syriana....when the two oil companies threw one of their boys "Danny Dalton" and one of their lawyers "Sydney Hewitt" to the Dept of Justice in order to allow their merger to go through....lets see if life really does imitate art.
Great reporting. Too bad there aren't any good ad driven investigative reporters that could get this story to the sheeple.
and it's gone....
i stick with my previous forecast that this goes no where...except a rabbit hole.
Wait, don't we have Ben on record saying if Ken wanted to invoke MAC, The Fed would release the dogs with the bees in their mouths? Umm, how do you give legal council to a company when Mt. Olympus is chucking thunderbolts in your general direction?
Looks like Scooter got a bunkmate.
Pretty cynical, or should I say realistic, commentary. Where is justice?
Dead.
BOA executives are pathetic, and Judge Rakoff knows it.
Ken Lewis gets paid millions of dollars to be Chief Executive Officer. Executive means one executes. Lewis gets paid tens-of-millions to make decisions.
So if he only made the decision because he lawyers told him to, then he should step down as CEO. Elevate the real decisionmakers to CEO.
This is absolutely terrible news. People could go to jail and have their careers destroyed. So you know what that means right? .... drum roll .... The stock market will shoot straight up tomorrow. Bernanke has handed out the money to his banking buddies and they are going to play this up as truly good news. Cramer will put some lipstick on this pig too.
Please wake me up when FAZ gets pushed down to $5.
Care should exercised when sticking pigs, as the tendency is for a lot of squealing.
Regards.
Wait a second. While there indeed may be some germ of an action against Wachtell here, the fundamentals have not changed: the lawyer provides advice, the issuer (and its officers) have the liability under 10b-5 and the proxy rules. If they got bad advice, they are not off the hook. "Herlihy" being the fall guy only empowers the "attorney-client" defense they are already hiding behind. Rakoff will point this out soon enough. The SEC is simply handing BofA its malpractice allegations for their own complaint.
There is the possibility that Herlihy may be the fall guy in terms of some theory that Herlihy in essence is the "issuer's officer" who made the call, but I still don't see any way for those who signed the proxy disclosures to get off the hook. Only outside Board members have a shot on the "reasonable reliance" theory to escape liability. Core officers do not.
Spade a spade: a decision was made not to prominently disclose the Merrill bonuses and the horrendous losses once known. Game over.
Spade a spade: a decision was made not to prominently disclose the Merrill bonuses and the horrendous losses once known. Game over.
Therein lies the crux of the matter. Well said.
Very interesting that the SEC appears willing to throw a potential future employer of current high-level SEC management under the bus. Kind of falls under the heading of "cutting off one's nose to spite one's face."
Cynics have their perspective distorted by the belief that everybody else are equally cynical. Believe it or not, you will find people at places like the SEC who actually take pride in being a part of what we call rule of law.
My own experience from taxes is that those who prove their abilities by inflicting the greatest wounds on tax payers are those who are grabbed first by the law firms. The law firms are looking for people with a track record and a proven ability to win cases. They are not looking for zombies.
My own experience from taxes is that those who prove their abilities by inflicting the greatest wounds on tax payers are those who are grabbed first by the law firms. The law firms are looking for people with a track record and a proven ability to win cases. They are not looking for zombies.
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That is mostly bogus. The banks and law firms like to hire people who follow the "wall street rule", which is basically that the SEC/TREASURY/FED/ETC is presumed to have blessed any category of deals in excess of 100 billion (or whatever), and just pursues deals considered outside pale by "the club".
The banks and law firms do not respond favorably to people who prevent or retroactively attack categories of deals that "the club" thinks are kosher, except maybe after "the club" has finished making its money on the deals and "the club" has moved on to other deals and any fine is small enough that its basically a rounding error compared to the profits.
BoA screwed their shareholders in the ass. Why Ken Lewis isn't looking forlorn in an orange jumpsuit by now is beyond me.
Lewis is out. Time to go after the lawyers.