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.
Roth's four-page e-mail begins: "Brian - As discussed, a draft of Ken's litigation-related talking points. Eric." Copied on the e-mail are Wachtell partners Edward Herlihy, Nicholas Demmo, Peter Hein, Richard Kim and Matthew Guest. Hein, like Roth, is a litigation lawyer; the rest practice corporate law.
The e-mail says any attempt to invoke the MAC would certainly cause Merrill to file suit. Roth then lists a half dozen reasons why Merrill's arguments could prevail in court. It lists no argument in Bank of America's favor. But perhaps the most compelling fact on the list was this one: The merger deal is governed by Delaware law and "no Delaware court has ever found that a MAC occurred permitting an acquiror to terminate a merger agreement."
Roth's e-mail concludes: "The potential danger here is that, if we declare a MAC and MER's business loses even more value as a result because, for example, retail customers pull their funds out, and then we litigate the MAC issue and lose, we could be required to close on a deal where MER is worth even less than it is today."
Still only hours later, according to associate GC Brenner's e-mail, Roth was on the phone trying to convince federal regulators why Bank of America believed it had a strong case to declare a MAC. Her e-mail refers to "Eric and Peter" with the names Roth and Hein scribbled in long hand on the copies released by investigators.
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.
Baxter then asked if the bank or the board had outside counsel other than Wachtell, "and we advised we did not," Brenner's note says.
The e-mails and discussions were followed over the next several days with phone calls between Lewis and federal regulators, including U.S. Treasury Secretary Henry Paulson, and the chairman of the Federal Reserve, Ben Bernanke.
During those calls, Lewis repeatedly said the bank believed it had a MAC. Paulson has testified that he told Lewis "that it would be unthinkable for Bank of America to take this destructive action for which there was no reasonable legal basis."
But the government blinked first, and agreed to give the bank more than $20 billion in extra bailout funds after it closed the merger on Jan. 1.