Experts See Only Slight Risk for Law Firms in BofA Case, Despite Judge’s Ire

U.S. District Judge Jed Rakoff’s refusal to approve a $33 million settlement between Bank of America and the Securities and Exchange Commission has put two law firms into the spotlight.

The firms are Wachtell, Lipton, Rosen & Katz, which represented Bank of America, and Shearman & Sterling, representing takeover target Merrill Lynch, the Wall Street Journal (sub. req.) reports. The proposed deal would have settled claims that Bank of America failed to disclose plans to pay bonuses to Merrill executives before acquiring the company.

On Monday, Rakoff said it was unfair to punish shareholders with a $33 million settlement when they were the ones injured. He noted that the SEC contends misleading proxy statements were apparently prepared by lawyers, and wondered why no penalties were sought against them.

The controversy has pushed the firms “out from the traditional role of behind-the-scenes advisers to the limelight of center stage,” the story says.

“Legal observers said there is a risk, though slight, that the firms could become defendants in the case or face a separate claim by the SEC that the lawyers violated professional ethics,” according to the article. Former SEC chairman David Ruder told the newspaper that the SEC is usually reluctant to focus on lawyer advisers because it wants to encourage legal advice, and prefers instead to focus on conduct by corporate executives.

Meanwhile, a separate Wall Street Journal story reports that Rakoff’s objections are likely to bring more scrutiny to SEC settlements, used to resolve an estimated 90 percent or more of its investigations.

Wayne State University law professor Peter Henning said the ruling could spur other federal judges to question SEC settlements.