This story originally appeared in sister publication The Am Law Litigation Daily.

An appeals court has revived allegations that a former Bingham McCutchen lawyer acted in bad faith by withholding evidence that would have supported investor claims against the firm’s client Merrill Lynch & Co Inc. Bingham’s opposing counsel said in an interview the ruling could put the firm on the hook for a large monetary sanction.

Bingham defended a broker-dealer unit of Merrill Lynch against allegations that it aided and abetted an alleged embezzlement scheme by Connecticut tax attorney Daniel Carpenter. Carpenter’s clients argue that former Bingham lawyer John Snyder (now of Nutter McClennen & Fish) improperly shielded documents that bolstered the aiding and abetting allegations.

Vacating a bench verdict from 2011, the Massachusetts Court of Appeals ruled on Friday that the evidence Snyder withheld “ran directly counter to the heart of Merrill’s defense” and that there was “no adequate basis in the laws for Snyder’s belief that he could withhold the information and still assert a defense claiming just the opposite.” The appeals court didn’t address whether Snyder acted in bad faith or whether Bingham should be sanctioned, however, remanding those questions back to the trial court for a follow-up hearing.

In the late 1990s, a group of Boston-based real estate investors entrusted their money to Carpenter. In court filings, they say Carpenter was supposed to hold their money in escrow accounts so they could minimize their tax liability. Instead, Carpenter invested their money in stocks through his accounts at Merrill Lynch’s broker-dealer unit. Carpenter lost much of their money during the dot-com bust in 2000.

In 2002, the investors won a $8.6 million verdict against Merrill Lynch and Carpenter’s company Benistar Property Exchange Trust Company Inc. Merrill Lynch was found liable on the assertion that it aided the alleged fraud. Anthony Zelle of Zelle McDonough & Cohen represents the investors.

The trial judge vacated the verdict against Merrill Lynch a few months later, finding insufficient evidence that it had knowledge of Carpenter’s alleged wrongdoing. In 2008 the Massachusetts Supreme Court ruled that the investors were entitled to a new trial against Merrill Lynch. In 2010 a jury once again found Merrill Lynch liable. Dickstein Shapiro defended Merrill Lynch in that case, taking over for Bingham.

In the first trial, while he’d been defending Merrill, Snyder told the court that company employees didn’t know that Benistar was trading other people’s money through its Merrill accounts. In fact, internal Merrill Lynch files showed that in 2000 an employee in the bank’s compliance department had accessed Benistar’s website, which clearly stated that it was in the business of handling other people’s money. Snyder had shielded the files on the basis of the work product doctrine, which protects materials prepared in anticipation of litigation from discovery by opposing counsel. Snyder argued that the compliance officer was acting at the direction of Merrill’s general counsel when he checked the Benistar Web page, so the work product doctrine applies.

Merrill finally produced the evidence of the website visit in 2009, according to Zelle, the lawyer for the investors. At that point, he roped Bingham into the case. After an eight-day evidentiary hearing, now-retired state court Judge Stephen Neel in Boston ruled in 2011 that Snyder acted in good faith and that Bingham isn’t liable for sanctions.

In Friday’s ruling, the Massachusetts Court of Appeals was harsher on Snyder. “The fact that a Merrill employee, lawyer or nonlawyer, knew that Benistar’s business was as an intermediary for third-party funds was significant to the plaintiffs in making out their claim,” Justice William Meade wrote for the court. “We are also of the view that Snyder’s persistence in pursuing a defense that included Merrill’s lack of knowledge of the nature of Benistar’s business and the website pages calls into question his good faith.”

Zelle told us that if Bingham is ultimately order to pay sanctions, his clients may seek $9.5 million from the firm. He also said that Snyder’s conduct was “very wrong,” and that he was “surprised” by the 2011 ruling that vindicated Bingham.

Bingham said in a statement that it “continues to believe that the trial court, which heard eight days of evidence, was correct in finding that John acted in good faith and with the proper legal basis for his decisions.” The firm added that it’s “confident that in further proceedings, John will once again be vindicated.”