Corporate Governance

SEC v. Bank of America: A Dissatisfied Judge Rakoff and A Questionable Stance on Privilege

By J. Robert Brown

Last week or so, the SEC and Bank of America filed with Judge Rakoff their views of the case.  In some respects, the two documents represented irreconcilable versions of the same case.  For Bank of America, it had done nothing wrong.  The disclosure was entirely accurate.  The $33 million settlement was only agreed upon to avoid the distraction of litigation.

From the SEC's perspective, Bank of America engaged in inaccurate disclosure.  But the agency couldn't pin the blame on anyone in specific because of reliance on outside counsel and the presence of the privilege. 

A day after the filings were in, Judge Rakoff gave his opinion and, frankly, he wasn't impressed with the submission of either side.  The submissions, he opined, "raises a few additional issues" that need to be addressed by September 9.  Specifically, the fine had been assessed against the Bank, which meant that shareholders and "arguably indirectly" taxpayers, would foot the bill.  Had the fine been imposed against individuals, it would not "come out of the shareholders' pockets." 

As for the argument that individuals could not be charged because the Bank had not waived privilege but relied on advice of counsel, Judge Rakoff rightfully noted the inconsistency of the argument.  

• This is puzzling.  If the responsible officers of the 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.  . . .  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. 

As for Bank of America's strenuous argument that it was not guilty of any wrongdoing, Judge Rakoff wasn't moved by that either.  The distraction argument brought this response:  "Whatever this chain of expressions may mean, if it is intended to suggest that Bank of America settled this case to curry favor with the SEC or to avoid retaliation by the SEC, the Court needs to know the specifics."

Both sides employed questionable strategy.  Advice of counsel is a common defense used in SEC enforcement actions but it by definition means that the privilege has to be waived at least to the extent the "advice" needs to be explored.  Advice of counsel and privilege are, therefore, mutually incompatible, a matter, as Judge Rakoff notes, of common sense.  As for Bank of America, its assertion of complete innocence, as we have noted, makes the payment of a $33 million fine seem a complete waste of corporate funds, particularly for a financial institution benefiting from TARP.  In short, it made the Bank look wasteful, something Judge Rakoff will no doubt explore in greater detail.   

We have posted the Judge's order and other primary documents on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on September 04, 2009 (boomark / email).