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Editor: Brian JM Quinn
Boston College Law School

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Friday, June 26, 2009

BAC-ML: The E-Mail

The internal e-mail disclosed as part of the House Oversight Committee's hearings on the BAC/Merrill deal make for some interesting reading.  In the exchange below Scott Alvarez, General Counsel for the Federal Reserve Board, lays out the major legal issues surrounding the last minute "MAC-attack" by Lewis.  He correctly identifies the disclosure issue with respect ML's losses as the real hot button legal problem for Lewis. 

From: Scott Alvarez
To: [Ben Bernanke]
Date: 12/23/08, 10:18AM

Mr. Chairman,
Shareholder suits against management for decisions like this are more a nuisance than successful.  Courts will apply a “business judgment” rule that allows management wide discretion to make reasonable business judgments and seldom holds management liable for decisions that go bad.   Witness Bear Stearns.  A different question that doesn’t seem to be the one Lewis is focused on is related to disclosure.  Management may be exposed if it doesn’t properly disclose information that is material to investors.  There are also Sarbanes-Oxley requirements that the management certify the accuracy of various financial reports.  Lewis should be able to comply with all those reporting and certification requirements while completing this deal.  His potential liability here will be whether he knew (or reasonably should have known) the magnitude of the ML losses when BAC made its disclosure to get the shareholder vote on the ML deal in early December.  I’m sure his lawyers were much involved in that set of disclosures and Lewis was clear to us that he didn’t hear about the increase in losses till recently. 

All that said, I don’t think it’s necessary or appropriate for us to give Lewis a letter along the lines he asked. First, we didn’t order him to go forward – we simply explained our views on what the market reaction would be and left the decision to him.  Second, making hard decisions is what he gets paid for and only he has the full information needed to make the decision – so we shouldn’t take him off the hook by appearing to take the decision our of his hands.
Let me know if you’d like any more information on this.
Scott
 

From: [Ben Bernanke]
To: Scott Alvarez
Date: 12/23/08, 11:08AM

Thanks, Scott.  Just to be clear, though we did not order Lewis to go forward, we did indicate that we believed that [not] going forward would detrimental to the health of (safety and soundness) of his company.  I think this is remote and so this question may be just academic, but anyway:  What would be wrong with a letter, not in advance of litigation but if requested by the defense in the litigation, to the effect that our analysis supported the safety and soundness case for proceeding with the merger and that we communicated that to Lewis?

From Bernanke's response, it's pretty clear that while the Fed didn't order BAC to close the deal, they probably told Lewis that if he decided not to close the deal that the world economy would implode and it would be all his fault.  Hmm.  Tough choice.  Tough choices like these are just examples of the "Big Deal" in action.

On the other hand, to the Chairman's question about preparing a letter to help with Lewis' potential defense in any lawsuit - through the combined wonders of e-mail and discovery, the letter he thinks might be helpful isn't required!

-bjmq

Recap of Bernanke's testimony:


http://lawprofessors.typepad.com/mergers/2009/06/macml-the-email.html

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