Risk & Compliance

Bank of America Waives Attorney-Client Privilege

The agreement with the Securities and Exchange Commission could portend tougher investigations of corporations.
Marie LeoneOctober 13, 2009

When executives read about how Bank of America is waiving its right to attorney-client privilege to cooperate with government investigations into its merger with Merrill Lynch, they will feel as though they are having a flashback to 1999. That was the year that then–Deputy Attorney General Eric Holder released his stunning “Holder Memorandum” to an onslaught of sharp criticism from the legal and corporate communities.

Written under Attorney General Janet Reno during the Clinton Administration, the Holder memo laid out factors that federal prosecutors should consider when deciding whether to levy criminal charges rather than civil charges against corporations, recalls litigation attorney Sara Shanahan, a partner at Sherin and Lodgen. “We all know what can happen in criminal prosecutions,” adds Shanahan, referring to Arthur Andersen, which surrendered its license to audit public companies after it was found guilty of criminal charges related to how it handled the Enron audit.

According to the Holder memo, a prosecutor can look at several factors to determine whether a company is giving its full cooperation to the government. These factors include whether the company has waived its “attorney-client and work product protection” as well as whether it has provided timely and voluntary disclosures of wrongdoing. The memo, says Shanahan, put pressure on companies to waive their legal rights. In return, they hoped to get lenient treatment from prosecutors.

On Monday night, Bank of America agreed to hand over to the Securities and Exchange Commission and other government arms documents related to the legal advice BofA received in connection with its merger with Merrill Lynch last year. The SEC is investigating whether BofA executives knew about the massive losses at Merrill before it merged with the brokerage house and whether the bank misled investors by withholding that information.

The documents being released are protected under attorney-client privilege. The bank is releasing them “to put the matter behind us,” BofA spokesman Larry DiRita told CFO.com. “Attorney-client privilege is a very important business principle, but in this instance, with pressure in multiple inquires for additional insight, we decided to waive it in this matter.”

The agreement “indicates our desire to fully cooperate with all of the inquiries. We have nothing to hide. We made all the appropriate disclosures at the time of the Merrill transaction,” said DiRita.

BofA is under three separate probes related to the Merrill merger: an SEC investigation; an inquiry by New York Attorney General Andrew Cuomo; and a review by a panel of the House Committee on Oversight and Government Reform, headed by New York Democrat Edolphus Towns. The bank informed both the Cuomo and the House panel that it was waiving its attorney-client privilege.

Ten years ago, the Holder memo sparked a strong negative reaction from lawyers and corporate executives. The critics claimed it violated the Sixth Amendment of the U.S. Constitution, which protects the rights of individuals and corporations that face criminal prosecution. In January 2003, Deputy Attorney General Larry Thompson issued an eponymous follow-up memo. The Thompson memo said that for a company to claim it was cooperating in a Department of Justice investigation, it had to waive its attorney-client privilege and give up material from internal investigations. In addition, it was barred from providing executives with a company-paid lawyer.

Corporations won a small victory in 2006 when the guidelines were revised by the so-called McNulty memo, written by former Deputy Attorney General Paul McNulty. The memo required that the deputy attorney general sign off on any prosecutor’s request to share attorney-client-privileged information.

Although the memos don’t apply directly to actions by the SEC, the Justice Department works closely with the securities regulator, often sharing information on prosecutions. The SEC has a similar policy called the Seaboard report, created by former commissioner Harvey Pitt. One of the most controversial Seaboard provisions is its recommendation that companies share the results of their internal investigations with the SEC, regardless of whether the reports are protected by attorney-client privilege.

In its statement released Tuesday, the SEC said that besides the information about Merrill bonuses, it was seeking documents that revealed “previously privileged details.” Included are details concerning the decision by BofA to disclose impairment of goodwill charges associated with the Merrill deal. The commission also wants to know more about whether the bank considered invoking the “material adverse change” clause in its merger agreement with Merrill. The clause gives the buyer an opportunity to walk away from the deal if the target company’s performance sinks below previously negotiated levels.

“If entered by the court, the order would result in a broad waiver of the attorney-client and other legal privileges on matters that are the subject of our pending action against the Bank as well as ongoing investigation,” SEC spokesman John Heine said in the statement.

The waiver agreement between BofA and the SEC must be approved by Judge Jed Rakoff, the U.S. District Court judge for Manhattan who denied the bank’s settlement with the SEC last month on the grounds that the deal was “unfair,” “unreasonable,” and “inadequate.” Rakoff, a former federal prosecutor, rejected a $33 million BofA resolution with the SEC that would have settled charges that the bank misled investors about $3.6 billion in bonus payments to Merrill employees.

The future impact of the BofA waiver of attorney-client privilege on investigations of corporations is unclear. But the high-profile case could send a signal to other companies that previous developments at DoJ may be usurped by a new Administration with a tougher enforcement agenda than the previous one — and a new Attorney General named Eric Holder.

In August 2008, for example, Deputy Attorney General Mark Filip announced that, as it did in the McNulty memo, the DoJ once again revised its corporate charging guidelines for federal prosecutors in favor of corporations. One of the main changes, according to Filip, was that credit for cooperation would not depend on the corporation’s waiver of attorney-client privilege or work-product protection, but merely on the disclosure of certain “relevant facts.”

But the three-pronged effort by the SEC, the New York Attorney General’s Office, and Congress to force BofA to waive its protection could portend a reversal of last year’s guidelines. The bank’s case could create a “chilling effect” with respect to how attorneys and their clients communicate, says Shanahan. “Certainly the government’s push for waiver of privilege in this case is going to be noted by companies all over America,” she says. “Expect people to remember this going forward.”