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A lot of people out there want to know what really happened in Bank of America’s acquisition of Merrill Lynch, which shareholders approved in early December 2008. In October 2009, investigators, private litigants and the curious public all came a step closer to understanding a decision that has come under scrutiny from all three constituencies: BofA’s failure, prior to the shareholder vote on the takeover, to disclose that the company it had just acquired would post a fourth quarter loss of $15.4 billion, and that BofA had set aside a bonus pool totaling $3 to $4 billion for Merrill executives.

After the merger was complete, the Securities and Exchange Commission (SEC) sued the bank for failing to disclose the bonuses to shareholders and later settled with BofA, which agreed to pay a $33 million penalty. It would have been the end of the SEC case.

But when the settlement came up for approval before U.S. District Judge Jed Rakoff of the Southern District of New York, he balked, unwilling to saddle the already suffering BofA shareholders with a $33 million fine when it wasn’t clear the perpetrators would be charged.

The SEC countered that the BofA executives had relied on the advice of counsel. In that case, Rakoff wondered in hearings, why not prosecute the lawyers? The pressure was mounting for BofA to waive the attorney-client privilege and reveal the conversations with its lawyers that led to the bank’s decision not to disclose.

But the tipping point seemed to come after a Sept. 8, 2009, letter to BofA from New York Attorney General Andrew Cuomo (who was leading an investigation parallel to the SEC probe). Cuomo’s office simultaneously threatened to charge BofA executives and criticized the bank’s “indiscriminate invocation of the attorney-client privilege.”

On Oct. 16, 2009, in a decision that shocked observers, the BofA board reversed its position, voting to waive the attorney-client privilege with regards to certain communications with its outside lawyers about the bonus disclosures.

That move has raised numerous legal issues and concerns, which will be the subject of litigation for years to come. Namely, it raises some of the major issues of attorney-client privilege discussed in the past few years, such as the impact of Federal Rule of Evidence 502 (FRE 502), the uncertainty of when privilege applies, and the Filip memo. It also may foretell what some lawyers believe will become a common scenario for corporations under investigation.

“This is going to continue to happen over and over again,” says Michele DeStefano Beardslee, a University of Miami associate law professor who focuses her research on privilege in the corporate setting. “We’ve been in what people have called a ‘culture of waiver’ for a long time, where at first the policy was to try to force companies to waive the attorney-client privilege as much as possible. [The BofA case] is a little bit different, but these questions are going to continue to come up more and more. It’ll be interesting to see how this one comes out, because it might set the stage for what’s to come.”

Siloed Subject

FRE 502, which took effect in September 2008, cleared the way for BofA’s move to waive privilege. The rule, aimed primarily at controlling e-discovery, limited privilege waivers to the communication or materials disclosed. Prior to its enactment, a party could be deemed to have waived the attorney-client privilege and work-product protection not only for information disclosed but also for any undisclosed information pertaining to the same subject matter.

On Oct. 14, Rakoff approved a BofA proposed order of protection that allowed the bank to waive attorney-client privilege and work-product protection in order to turn over communications to the SEC and bolster its advice of counsel defense. Thanks to FRE 502, the bank could do so without waiving privilege and protection regarding “other information that may be of interest in related private lawsuits.”

“The government is going to have access, but plaintiffs who want to sue BofA privately aren’t going automatically to have access to documents that the bank didn’t turn over,” Beardslee says. “Under the old rule, they might have been able to do that because it would have been a subject matter waiver, so anything under that subject matter would have been discoverable.”

However, that’s not the end of it. Even without subject matter waiver, there will be questions as to which documents the attorney-client privilege actually protects.

Privilege Pitfalls

Exploring what communications are protected by the attorney-client privilege is an ongoing process for our legal system (see “Proper Practices“), one that Beardslee recently explored in a paper.

“There are a lot of misperceptions about what the attorney-client privilege actually covers,” she says. “Just because you have a lawyer in the room doesn’t mean the attorney-client privilege is going to protect those communications, and I believe there are people out there who don’t completely understand that.”

Beardslee’s paper focused on how courts view the communications of a lawyer and a third-party consultant that lawyer turns to in order to better advise the client. Cases taking up the question have gone both ways.

Craig Newman, a partner at Richards, Kibbe & Orbe, lately has been advising clients to be very cautious with regard to privilege in certain situations, such as large meetings or conference calls. The risk is for outside counsel too, of course, since it’s up to the client, not them, to waive privilege.

“There are going to be circumstances under which lawyers don’t realize they’re giving advice on things that might see the light of day,” he says.

There’s little case law on the matter, but Newman sees it as an area corporations shouldn’t ignore, especially in these days of financial restructurings. Such transactions require frequent meetings between the client, attorney and constituencies such as senior lenders, junior lenders, equity participants, and others. He cites a ruling from the Southern District of New York in HSH Nordbank v. Swerdlow, which made it clear that in some situations, those communications will not be covered by the privilege.

“I don’t think most people understand the gravity of that risk,” Newman says, “from either a litigation or a regulatory perspective.”

In litigation, controversy might arise if, to use the restructurings scenario above, two of the lenders face adversity down the road or if the borrower gets into a contest with a lender. And the SEC might take interest if one of those lenders is an investment bank that, in other divisions, trades in stock and debt.

“Given what happened with BofA/Merrill, people are really focused on this right now,” Newman says. “We’re advising our clients to use additional safeguards so that, when they get on these conference calls and have these meetings, we can give them a higher degree of comfort that these communications will in fact be protected by the privilege, and help them design ways to minimize the risks.”

Prosecutorial Pressure

Defense attorney Bruce Barket, a partner at Quadrino Schwartz, has concerns about why the BofA board decided to waive privilege in the first place–namely, that the bank’s board flipped only in an apparent attempt to protect individual executives (such as CEO Ken Lewis) after Cuomo threatened to indict them.

Cuomo’s aggressive stance resembles the kind of pressure on the attorney-client privilege that the 2008 Filip Memo, aimed at the DOJ’s charging tactics, backed away from in response to mounting concerns about prosecutorial misconduct in corporate investigations.

Although Cuomo is not subject to DOJ guidelines, the scenario troubles Barket, who says outside counsel who fear their advice will someday be analyzed in the courtroom may withhold information, leading to a breakdown of the system.

“The pressure that’s brought to bear can be heavy handed at times, and the threats to indict or charge executives [in the BofA case] seem to be, at least arguably, over the line,” Barket says. “What kind of chilling effect is this going to have? It’s clear the law firms aren’t thrilled that their advice, which they thought was going to be private, is now public and subject to scrutiny.”

In other words, even post-Filip Memo, the pressure on corporations to waive attorney-client privilege when they are the subject of investigations is alive and well.

The pressure to waive privilege can come from the public as well, either directly or not.

“For BofA, [in considering this waiver] they’re also weighing the cost to a corporation’s good name,” Barket says. “If they’d dug in their heels and insisted that they weren’t going to waive the attorney-client privilege, they would have been in for a number of litigations on different fronts and bad publicity.”

And in this new age of corporate scandals and mistrust, being seen as “hiding behind privilege” can only be a PR liability.

“Because there’s been a lot of misconduct by various types of professionals in the past few years, any type of privilege that protects information from the public view, and that people may believe is actually protecting corporate wrongdoing, is going to come under a microscope, and there’s going to be pushback from the public to try to get at that information,” Beardslee says.