Last June, when Bank of America CEO Ken Lewis was asked by a U.S. House committee why the bank hadn't disclosed seemingly important information about its upcoming Merrill Lynch acquisition in a proxy statement last November, he had a ready response:"I'm not a securities lawyer," he said. "I don't decide on disclosures."
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But now, thanks to U.S. District Judge Jed Rakoff of Manhattan, the stonewall is crumbling.
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SEC: We can't prove the individual executives did anything wrong because they tell us they simply delegated to their lawyers the task of handling the disclosure obligations.
Rakoff: Then go after the lawyers.
SEC: We don't know what the lawyers said, since the executives invoked their attorney-client privileges.
Rakoff: If the officers are saying they relied on counsel, they're automatically waiving the privilege. Plus, there's a crime-fraud exception to the privilege, so you could have asked me to order them to answer.
SEC: Not really. We haven't charged anybody with fraud. We just charged a lesser infraction -- filing a false proxy statement -- which does not require proof of a fraudulent state-of-mind, so the officers never had to formally invoke a reliance-on-counsel defense. Accordingly, neither the bank nor Merrill ever waived their attorney-client privileges either.
Rakoff: Why didn't you charge anyone with fraud?
SEC: We couldn't prove fraudulent intent.
Rakoff: Why not?
SEC: They said they relied on advice of counsel.
See why Rakoff got steamed?
This article is a great read on the status of the SEC vs. Bank of America case, mostly for that last segment on 'why Rakoff got steamed'. Hopefully, something will come of this. Transparency at the big banks, and on Wall St. in general, is badly needed. This also plays into a post on corporate governance I still need to do.
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To play devil's advocate:
ReplyDeleteThe burden of proof for establishing wrong doing is on the accuser not the defendant. Why would BoA disclose anything and incriminate themselves in the process. They must stonewall as much and as long as they can. It's SEC's role to prove fraud. And by SEC's own admission it could not prove fraud.
Remember in a 'civilized society' you are always innocent unless proven guilty. (you could be guilty but it does not matter as long as it can't be proven).
Good corporate governance is a calculated gamble on risk vs. reward.
Agree entirely. I think the purpose of the article is to criticize SEC's pathetic investigative procedures. In that sense, you're not playing devil's advocate at all!
ReplyDeleteGood corporate governance, when I get to it, would naturally not come from "goodwill" of the company - that never works. Instead, it would have to come through investor activism or regulation. I'll get to that when I have time; I keep trying, but it's a pretty big topic, and I tend to end up with too many thoughts for a coherent post.