BacMerSaga Sidebar: On Judge Jed Rakoff and Corporate Lawyers

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Of all the legal news last week, there was one development that put fear into the hearts of both federal securities regulators and corporate lawyers: BacMerSaga. (Pronounced “back-MERCE-uh-guh.”) Click here for LB background on the case.

For lawyers, the fear crept in when U.S. District Judge Jed Rakoff asked the SEC why it wasn’t seeking penalties from Bank of America’s M&A lawyers at Wachtell Lipton who, according to the SEC, “made the relevant decisions concerning the disclosure of the [Merrill] bonuses.” There is also the potential, equally scary for corporate lawyers, that the veil of attorney-client privilege in this case or another possible BacMerSaga case could be pierced if bank executives, in their defense, testify that they acted on advice of their lawyers.

If any corporate lawyers do end up getting government heat for their role in BacMerSaga, they should watch out for Rakoff. In fact, the judge’s past comments on corporate lawyers led to his recusal last year in a civil case.

In the case, called DK Acquisition Partners LP et al v JP Morgan Chase & Co. et al., the plaintiffs sought to recover losses after they made loans to Enron Corp. through JP Morgan Chase and Citigroup, shortly before Enron’s collapse in 2001. The plaintiffs claimed that the banks knew that Enron engaged in accounting fraud because the banks themselves had allegedly made loans to Enron and disguised them as commodities-related transactions, allowing Enron to account for them improperly.

When the case finally arrived on Rakoff’s docket, JPM’s lawyers from Simpson Thacher dredged up remarks Rakoff made at a 2004 American Bar Association meeting in which he lambasted the bank, the bank’s in-house lawyers and its outside counsel from Milbank Tweed based on evidence he’d seen in a separate but related case that went to trial in his court two years earlier:

“…what was really, quite frankly, shocking to me…was the fact that numerous lawyers, not just within Enron but within [JPM] and outside counsel for the bank as well, signed off on these transactions as not being loans, as being proper under New York law, as being appropriate reciprocal swap transactions or whatever.”

“…it was something of an eye-opener for me to see that so many singly responsible lawyers, from responsible law firms, with highly distinguished careers, could sign off on something that seemed so palpably a charade and, at a very minimum, it makes me concerned about where the profession is headed.”

“Legally, could this have supported both civil and criminal charges? I suppose it could.”

Milbank didn’t respond to requests for comment.

In a letter to the judge arguing why he should step down, Simpson Thacher lawyers also referenced an article Rakoff wrote entitled, “Is the Ethical Lawyer an Endangered Species?”

Wrote Rakoff in that article: “The reports issued by the government authorities and bankruptcy examiners in cases like Enron, Worldcom, Tyco, Adelphia, and the like have a common theme so far as the lawyers are concerned: When asked to opine on the legality of questionable arrangements, the lawyers have regarded it as their duty to approve these arrangements if there appears any technical ground on which they might do so, however far-fetched.”

At a hearing in the DK Acquisition case, before he recused himself, Rakoff engaged in a fascinating debate with lawyers on both sides as to whether a “reasonable person” might conclude that he was biased and should be recused. (The transcript was not available.) Rakoff said he’d forgotten about the comments he made in 2004 and was struck by their “colorfulness.” Rakoff declined to comment to the Law Blog.