Bank of America Corp.’s announcement Friday that it would pay $2.43 billion to settle shareholder litigation over its purchase of Merrill Lynch & Co. in 2009 was likely a tough pill to swallow for the bank, which had tenaciously fought this case. For three-and-a-half years, BofA and its outside lawyers insisted that its disclosures about the Merrill deal were adequate. But after it lost ruling after ruling, and it faced an October 22 trial date, the bank finally threw in the towel. (Our affiliate The National Law Journal has coverage of that settlement here.)
This massive settlement raises questions about BofA’s litigation strategy. In particular, was it wise for Bank of America to choose Wachtell, Lipton, Rosen & Katz to lead its defense when Wachtell advised the company on the underlying disclosure issues? The American Lawyer raised this issue three years ago soon after the shareholder suits were filed, questioning whether Wachtell’s desire to defend its advice might color the bank’s litigation tactics. (You can read that article here.)
“If Wachtell is advising [BofA] on the litigation. . .you wonder how much the litigation strategy is going to be shaped by preserving Wachtell’s reputation,” said professor James Cox of Duke Law School at the time.
Columbia Law School professor John Coffee Jr. said on Friday that in general a company would be wise to consider using a firm for litigation that wasn’t involved in the underlying events. “As a prophylactic general rule, normally a defendant should get a different law firm than the transaction planners,” he said. “I have the highest respect for Wachtell. They have some of the best litigators in America. But you have problems when you’re defending advice you gave the client, as well as the client’s actions.” He stressed that it’s not unethical or wrong to use the same lawyers, but it can be problematic.
Wachtell was also working with co-counsel at Cleary, Gottlieb, Steen & Hamilton, which was not involved in the underlying deal. Together they argued that BofA did not have to disclose $5.8 billion in bonuses that were paid to Merrill executives and that the bank had not concealed from shareholders the full extent of Merrill’s losses before they voted on the merger. Manhattan U.S. District Judge P. Kevin Castel largely rejected the bank’s defenses in pretrial rulings. In August 2010 he denied the defendants’ motion to dismiss in this 140-page ruling. Particularly harmful to the bank, he held that the plaintiffs could pursue negligence claims under Section 14(a) of the Securities Exchange Act of 1934, which doesn’t require a showing of scienter. Wachtell and Cleary tried to get him to reconsider, but he refused. Then last February he granted the plaintiffs’ request for class certification in this ruling.
It’s hard to know if another law firm might have been willing to settle earlier, possibly for less. On the one hand, a law firm in the position of Wachtell might have felt so strongly that its disclosure advice was correct that it would advise the client to keep fighting. On the other hand, a firm in that position might push for settlement to avoid having its role scrutinized any more.
Wachtell declined to comment, as did Bank of America, and the plaintiffs lawyers who were contacted.
As the trial date grew closer, Bank of America did bring in new trial counsel. As the Litigation Daily reported in April, the company pulled in Paul, Weiss, Rifkind, Wharton & Garrison, with partner Theodore Wells Jr. assuming the role of lead trial counsel. It had become clear that Wachtell would be an awkward choice for trial counsel. During discovery Wachtell partners were deposed by the plaintiffs and may well have been called as fact witnesses. And their testimony may not have been favorable to the company.
Edward Herlihy and other Wachtell partners testified in their depositions that they weren’t told about the full magnitude of Merrill’s losses until after the shareholder vote, according to the plaintiff’s opposition to the defendants’ motion for summary judgment.