Posted by
alfredlester on Thursday, October 15, 2009 11:36:53 PM
Bowing to pressure from Washington&S217;s pay czar, Kenneth D. Lewis agreed on Thursday to forgo his salary and bonus as chief executive of Bank of America, as new legal questions emerged about the troubled takeover of Merrill Lynch that led to his downfall.
Two weeks after abruptly announcing his resignation, Mr. Lewis promised to return the pay he received this year to avoid a confrontation with Kenneth R. Feinberg, the Obama administration&S217;s overseer of executive compensation. Mr. Lewis, who plans to retire on Dec. 31, still stands to collect a $53.2 million pension, which will fall under Mr. Feinberg&S217;s purview.
The move came as new details emerged about the role of a prominent law firm in Mr. Lewis&S217;s star-crossed acquisition of Merrill Lynch at the height of the financial crisis.
The firm, Wachtell, Lipton, Rosen &&8; Katz, initially advised Bank of America to withhold information about the perilous state of Merrill from the bank&S217;s shareholders, but later advised it to alert federal officials to the growing losses, according to four people with direct knowledge of the matter.
The developments thrust Wachtell, a white-shoe adviser to corporate America, into one of the most troubled and closely watched deals of the financial crisis. Bank of America maintains that it did not mislead investors. But its disclosures are now the subject of several state and federal investigations. The legal snarl, and shareholder ire over the deal, prompted Mr. Lewis to resign. Legal experts say the ultimate responsibility may lie with Bank of America, not its lawyers.
Bank of America plans to turn over documents Friday that are expected to shed new light on the deal and on Wachtell&S217;s role in it. The bank could face greater scrutiny if the documents show that executives knowingly misled investors or government officials.
Wachtell also advised Bank of America that it probably could not back out of the deal, even if it tried, according to the people with knowledge of the matter. And Wachtell kept Merrill&S217;s bonuses hidden from investors, without consulting the bank&S217;s management, the four people said. That, however, is often standard practice in preparing merger agreements.
A spokesman for Wachtell declined to comment on the legal advice it provided Bank of America. The bank also declined to comment. The New York attorney general, Congress and the Securities and Exchange Commission are looking into why the bank did not tell shareholders that Merrill had suffered huge losses and had made large bonus payouts just before the deal. The bank has said it does not believe it misled investors.
According to another person briefed on the matter, Edward D. Herlihy and Nicholas G. Demmo, top lawyers at Wachtell, have received subpoenas from the attorney general of New York, Andrew M. Cuomo.
Wachtell was intimately involved in the Merrill merger from the start. The negotiations took place in the law firm&S217;s Midtown Manhattan offices. Mr. Herlihy, a 25-year veteran of the firm who had long worked with Bank of America on other deals, was already close with Mr. Lewis.
In early November, a team that Bank of America put in place to oversee Merrill&S217;s transition spotted large losses as they grew on Merrill&S217;s books. Alarmed, bank executives held marathon meetings on the weekends around Thanksgiving. They contacted Mr. Herlihy with a pressing question: should Bank of America executives disclose Merrill&S217;s gaping losses to shareholders?
As the vote on the merger approached, Wachtell told the bank&S217;s executives that shareholders did not need to know about Merrill&S217;s losses, and needed to be notified only if the losses would be far worse than the fourth-quarter results at Goldman Sachs, Morgan Stanley and other peers, said the four people briefed on the matter.
Some of the documents the bank will submit on Friday will show communications between the bank and Wachtell in which they discussed analysts&S217; expectations for other investment banks.
Mr. Lewis and his chief financial officer, Joe Price, conferred with Merrill executives, and they determined the losses were likely to be of the same scale as those at the other investment banks, these people said check cash advance. In the wake of that conclusion, the bank did not send out a warning to its shareholders.
But there was some dissent within Bank of America, according to a person with knowledge of executives&S217; discussions. Some deputies believed the bank should disclose Merrill&S217;s predicament before the shareholder vote anyway.
Legal experts said they were surprised at the advice Wachtell gave Bank of America about Merrill&S217;s losses.
&S220;I&S217;m taken aback by the advice,&S221; said Donald C. Langevoort, a professor at Georgetown Law. &S220;When shareholders are asked to vote, they deserve a fine-tuned picture and are not to be expected to piece together pieces of public knowledge, public awareness and economic awareness in order to make the right decision.&S221;
Charles Elson, a bank shareholder and professor of corporate governance at the University of Delaware, found Wachtell&S217;s advice defensible but disturbing.
&S220;I think the shareholders are entitled to know everything that management knows on a vote of this size.&S221; he said. &S220;Let the investors decide. The losses might have been in line with Goldman and Morgan, but Bank of America wasn&S217;t acquiring Goldman or Morgan.&S221;
Several weeks after the shareholder vote, Goldman and Morgan Stanley reported their quarterly earnings. It then became clear that Merrill was performing far worse than its peers, these people said. It is unclear whether Bank of America at that point considered disclosing Merrill&S217;s losses, given that the shareholder vote was already over and the deal was just weeks from closing.
On Dec. 17, Mr. Lewis and Mr. Price flew to Washington to meet with officials from the Federal Reserve and the Treasury Department. They traveled with talking points in hand that had been prepared by Wachtell. The first item on the page was a note suggesting that the executives should tell the government officials that Bank of America was considering backing out of the deal, said one of the people with knowledge of the matter.
That talking point flew in the face of legal advice that Wachtell had earlier given the bank, that it was unlikely that Bank of America could get out of the merger given the terms of the deal. In particular, the law firm told the bank it probably could not end the deal even though the value of Merrill&S217;s assets were more degraded than first thought, the people said. The bank also considered trying to undo the merger based on concerns about Merrill&S217;s liquidity.
Since the deal closed early this year, Mr. Herlihy has continued working with the bank, which has since hired two other law firms. The bank had kept the details of Wachtell&S217;s advice under wraps, and did not agree to send the investigators documents reflecting the advice until a few days ago, when it gave up its right to keep conversations between clients and their lawyers private.
Even as the bank waives that right, Wachtell has not given investigators its own in-house documents to investigators. Because Wachtell never provided its own internal documents to the bank, the law firm argues, it owns the documents, the four people familiar with the matter said.
&S220;We have not refused to provide any documents or information to the bank,&S221; said Mr. Anders, a partner at the firm.
Legal experts said the law firm&S217;s advice would either make a case against Mr. Lewis and the bank, or weaken it. While Mr. Lewis relied on his lawyers&S217; advice, corporate responsibility generally rests with the chief executive.
&S220;It&S217;s hard to overstate how important it is knowing what they were told by their lawyers,&S221; said David Skeel, a law professor at the University of Pennsylvania. &S220;It will make it much easier to isolate who knew what, and who was on board with the decisions, and who wasn&S217;t.&S221;
Jack Healy contributed reporting.
Bank Chief Forgoes Pay for 2009