Did Bank of America CEO Ken Lewis Listen to His Lawyers?

Sue Reisinger

Corporate Counsel

Ken Lewis doesn't like lawyers. He especially doesn't seem to like Tim Mayopoulos, his former general counsel at Bank of America Corp., according to insiders.

But not liking lawyers and not listening to them are two different things. And that raised some key questions for Lewis and the Charlotte, N.C.-based bank. Such as: In the tumultuous weeks leading up to the bank's acquisition of Merrill Lynch & Co., Inc., a year ago, what did Mayopoulos and the bank's outside lawyers advise? And did Lewis listen?

Whether or not Lewis, who will step down Dec. 31, took his lawyers' advice is now at the heart of hearings before Congress, and investigations by the Securities and Exchange Commission, the U.S. Department of Justice, and the attorneys general of New York and North Carolina. For one thing, the investigators want to know why Lewis was acting on certain information behind the scenes, while not disclosing that information to shareholders. About two dozen shareholder suits are looking at the same thing.

For example, Lewis said that the bank didn't know about Merrill's $5.8 billion year-end bonus pool before the shareholder vote, but it did. Then he said that the bank didn't know about Merrill's accelerating losses before the shareholder vote, but it did. As one in-house lawyer close to the deal put it: "His public statements show that he needs a strong general counsel, because most of us would not let our executives say things that are demonstrably, provably false. This guy really needs to take some legal advice before he speaks."

But there's more. Corporate Counsel's review of documents and e-mails in those hectic weeks before the merger closed shows not only that Lewis knew about the losses, but that he used this private knowledge to play a high-stakes game of chicken with the federal government. He told the feds that he was considering pulling out of the Merrill deal completely. Everyone knew that meant Merrill couldn't survive on its own -- and its demise could have been catastrophic to the world's fragile financial system at that time.

In September 2008 the world's markets panicked after Lehman Brothers Inc. went into bankruptcy. So Lewis' suggestion in December that he'd walk away from the Merrill deal and let it fold amounted to a nuclear threat. Little wonder that the feds flinched. They secretly promised Lewis more bailout money and other support if he went through with the deal.

Apart from the drama, the Bank of America standoff shows how core concepts of corporate governance -- disclosure and transparency -- can be compromised in high-stakes situations. And it stands as a cautionary tale to all corporate counsel. During those critical days in December, Mayopoulos, now general counsel at Fannie Mae in Washington, D.C., was ousted from the bank, without notice and without explanation.

At the same time, the bank dismissed deputy general counsel David Onorato, chief of litigation and securities inquiries. (Onorato, now a partner with Freshfields Bruckhaus Deringer in New York, and Mayopoulos both declined to comment.) Even though Lewis had Merrill's veteran general counsel, Rosemary Berkery, in the wings, he ignored her, and she quickly left just before Christmas. Eventually, Lewis named deputy general counsel Edward O'Keefe as the new general counsel for the country's largest bank, with $2.3 trillion in assets and 6,100 branches.

What transpired between Lewis and his in-house lawyers may never be fully revealed. Bank spokesman Scott Silvestri insists that the departures weren't related to the merger. Silvestri also says the terminations weren't performance-related. Then what were they? We may never know, because Lewis is clinging to attorney-client confidentiality. But a federal judge, New York attorney general Andrew Cuomo, and the head of at least one congressional panel are pressuring to pierce that privilege.

Legal experts say that it is nearly unheard-of for a Fortune 100 corporation to dismiss its general counsel in the middle of a huge merger. Charles Elson, director of the Weinberg Center for Corporate Governance in Delaware, calls it highly unusual. "It doesn't happen often, particularly without allegations of misconduct, and in the middle of such a situation," Elson says.

Elson agrees that the timing of the ouster raises questions about whether there were major internal disagreements over the disclosure decisions. "There's too much smoke to ignore," he concludes. "As a shareholder of Bank of America, I'd like to know why."