Aug. 28 (Bloomberg) -- When landing in white-collar trouble, it might sound like a solid defense to say you only did what the lawyers advised. Unless you waive attorney-client privilege, no one will know what your lawyer told you.

That’s what Bank of America Corp. Chief Executive Officer Kenneth Lewis tried when the U.S. Securities and Exchange Commission delved into the bank’s bonus scandal stemming from its merger with Merrill Lynch & Co.

To recap, Merrill was gasping its final breath last year, thanks in part to foolish risks taken by some of the folks who would be on the receiving end of $3.6 billion in bonuses.

Bank of America, which accepted $45 billion in government funds, knew about the bonuses ahead of time, approved as much as $5.8 billion of them but told shareholders there would be no discretionary bonuses when it asked them to vote in favor of the takeover.

After the bonus news hit the fan, the SEC suspected that Bank of America and Merrill hadn’t been entirely forthcoming on the topic.

To defend themselves, Lewis and Merrill Chief Executive Officer John Thain told the SEC that inside and outside counsel told them exactly how, whether and where to disclose bonus information.

It was the lawyers who drew up the papers, the lawyers who said it was just fine to save certain details for an undisclosed document, Lewis and Thain each claimed.

Ambulance Chasers

We aren’t talking about ambulance chasers here. Beyond the in-housers, Merrill relied on the 136-year-old Shearman & Sterling firm. Bank of America got advice from Wachtell, Lipton, Rosen & Katz, a leader in corporate matters. Among the deals Wachtell Lipton has shepherded was JPMorgan Chase & Co.’s $1.18 billion acquisition of Bear Stearns Cos. with help from the Federal Reserve.

If lawyers like that told the banks they were following the law, that sounded like a pretty good defense to the SEC. You can’t prove evil intent if the banks were only doing what their high-paid lawyers told them to.

So the federal agency, figuring it might lose if it pursued its allegations against Bank of America, agreed to a $33 million deal. Likewise, the bank claimed it had a host of “powerful defenses” to the accusations but decided for business reasons to settle.

Case closed and settlement approved? Hardly. It is just now getting interesting.

The judge assigned to review the deal isn’t ready to sign off on it.

Legal Cover

The bank can’t hide behind its lawyers, U.S. District Judge Jed Rakoff said this week in a court order.

Rakoff isn’t convinced the settlement is in the public interest. Among the things that got his attention were the nasty things the SEC had been saying about Bank of America.

“Bank of America made materially false and misleading statements and omitted to disclose certain material facts in the proxy statement,” the SEC says in its complaint.

If that’s true, then $33 million isn’t “remotely reasonable,” Rakoff said in court earlier this month.

Now the agency must defend the settlement to the judge. And that’s why the SEC wound up saying it would have had a hard time proving its case, given the bank’s claim it relied on counsel and given that it hadn’t waived attorney-client privilege.

“This seems so at war with common sense,” Rakoff wrote. If the SEC is to give any weight to the bank’s defense, the bank must waive the privilege so regulators can see for themselves whether the defense rings true, he said.

Proxy Statement

“It also leaves open the question of whether, if it was actually the lawyers who made the decisions that resulted in a false proxy statement, they should be held legally responsible,” Rakoff wrote.

Who does he think he is, anyway?

Rakoff points out that the bank’s shareholders would have been the victims of any false proxy statements, yet they would have to pay for the settlement.

The judge quotes from a 2006 SEC policy, which says that in such situations the agency would “seek penalties from culpable individual offenders acting for the corporation,” rather then from the company, which is really the victimized shareholders.

Clearly, that isn’t what the SEC is doing here. And to see whether there is evidence to support doing that, it would have to dig further.

So now the bank must make a big decision. To satisfy Rakoff, it might have to let the SEC rummage through its dealings with its lawyers.

Private Communications

If Bank of America gives up its right to keep those communications private, the SEC will have company. It will find New York Attorney General Andrew Cuomo, shareholders’ lawyers, congressional investigators and who knows who else digging into the bank’s former secrets.

Rakoff did suggest another out. If, as Bank of America says, the SEC is wrong and the bank fully informed its shareholders, the attorney-client issue will have “less relevance” on his decision whether to approve the settlement.

Relevant or not, Rakoff wants the bank and the SEC to speak to the attorney matter in yet more briefs.

And this time around, anyone who blames the lawyers is probably going to have to give up the privilege of hiding behind them.

(Ann Woolner is a Bloomberg News columnist. The opinions expressed are her own.)

To contact the writer of this column: Ann Woolner in Atlanta at awoolner@bloomberg.net.

Last Updated: August 27, 2009 21:00 EDT