I have no problem criticizing Bank of America for deceptive conduct or blaming Wachtell for the failure of a legal stategy, but there’s nothing obviously wrong with this:
Eric Roth, a litigation partner at Wachtell, Lipton, Rosen & Katz, apparently was telling the Bank of America Corp. leadership one story about how difficult it would be to escape from the merger with Merrill Lynch & Co. Inc., while singing quite a different tune to the federal government.
E-mails from Roth and in-house lawyers at the bank were among documents released last week from the House Committee on Oversight and Government Reform, which is investigating the merger. Roth and Bank of America representatives did not return calls for comment on this story.
The e-mails show that early on the morning of Dec. 19 Roth advised the bank’s chief executive, Ken Lewis, and its interim general counsel, Brian Moynihan, on how difficult and financially risky it would be to try to invoke a so-called MAC — or material adverse change — clause, which would allow the bank to get out of the merger with Merrill.
But another e-mail from associate general counsel Teresa Brenner to Moynihan, sent several hours later and on the same day as Roth’s e-mail, says, "Eric made a very strong case as to why there was a MAC" during a conference call with some officials from the Federal Reserve.
The e-mails appear to confirm previous Corporate Counsel stories that the bank was telling federal regulators that it wanted to declare the MAC, even though its own lawyers and leaders knew that legally it probably could not succeed. If the bank were to make public its MAC threat, government regulators have said Merrill would have collapsed, causing severe damage to the shaky U.S. financial system at the time.
Although it’s not a given that the Rules of Professional Conduct would apply to an argument before the Federal Reserve, let’s assume that, by way of Rule 3.9, all the basic duties of merit, candor and fairness apply.
Under those rules, there’s nothing wrong with advocating on behalf of your client an argument you believe "probably could not succeed." There are two sides to every story, and at least two interpretations of every legal issue. The United States uses an adversarial legal system precisely so that these stories and interpretations can be fully developed, critiqued, and challenged.
Indeed, it’s clear the Federal Reserve’s lawyers knew how weak Bank of America’s case was:
Brenner’s e-mail states that all questions other than one came from a "prickly" Thomas Baxter Jr., general counsel of the New York Federal Reserve Bank. The other question came from Scott Alvarez, general counsel to the Federal Reserve Board in Washington. Baxter "pointed out that there had never been a successful MAC case before," the e-mail says, but Roth countered "that this one essentially could be the first" because of the magnitude of Merrill’s losses
Just as the NY Fed’s lawyer had no duty to say if he thought the Bank of America / Merrill Lynch merger could become the first successful material adverse change case, Bank of America’s lawyer had no duty to say if he thought Bank of America was unlikely to win. Lawyers have no duty to reveal what they believe are the strengths and weaknesses of their case, nor how likely they believe it is that their client will prevail.
There is, however, an ethical issue lurking deeper under the surface. There is a dispute (and shareholder class action) as to when, exactly, Bank of America learned of Merrill Lynch’s losses. The executives at Merrill Lynch have suggested that BoA knew of the losses before it consummated the merger. If that’s true, and Bank of America’s lawyers knew it, then they’re in a tighter spot, since the essence of a "material adverse change" is the change in circumstances after the merger consummation. One wonders how a lawyer could in good faith argue for a "material adverse change" arising from circumstances known before the merger.
But that’s an issue for another day.