UPDATE: Merrill Lynch FINOP Cited By SEC for Unprecedented Violations

From 2009 to 2012, Tirrell aided and abetted and caused unprecedented violations of Sections 15(c)(3) and 17(a)(1) of the Exchange Act and Rules 15c3-3, 17a-5(a), and 17a-5(d) thereunder by Merrill Lynch, Pierce, Fenner & Smith, Inc. ("MLPF&S") and its wholly-owned subsidiary, Merrill Lynch Professional Clearing Corp. ("MLPro" and, together with MLPF&S, "ML").

During this period, ML willfully violated Section 15(c)(3) of the Exchange Act and Rule 15c3-3 thereunder. Known as the Customer Protection Rule ("Rule"), Rule 15c3-3 requires broker-dealers to safeguard the cash of their customers so that customer assets can be quickly returned if the firm fails. ML violated the Rule by failing to deposit a sufficient amount of cash in a customer reserve account it was required to maintain pursuant to Rule 15c3-3(e), thereby placing billions of dollars of ML customers' money at risk. ML underfunded its reserve account by billions of dollars through the use of trades, known internally as Leveraged Conversion Trades ("Trades"), that improperly used ML customer assets to finance its own activities.

Tirrell was MLPF&S's Head of Regulatory Reporting, which is the department responsible for, among other things, ensuring ML protects its customers by complying with Rule 15c3-3. Tirrell was also MLPF&S's designated Financial and Operational Principal ("FinOp"), assuming specific and primary responsibilities for the firm's compliance with the Rule. In these capacities, Tirrell and his subordinates calculated the customer reserve requirement each week. Tirrell knowingly reduced the amount ML reserved by billions of dollars as a result of the Trades despite knowing that regulators had significant unanswered questions about changes being made to the Trades, changes that Tirrell both approved of and failed to address with those regulators. In addition, he failed to accurately disclose the purpose of the Trades to regulators and repeatedly ignored requests from regulators for information that, if provided, would have put an abrupt end to the Trades. In so doing, Tirrell was reckless and negligent. 

Tirrell likewise was reckless and negligent in aiding and abetting and causing ML's violations of Section 17(a)(1) of the Exchange Act and Rule 17a-5(a) thereunder as well as MLPF&S's violation of Rule 17a-5(d) thereunder, which the firm violated by submitting required Financial and Operational Combined Uniform Single ("FOCUS") Reports and required annual financial reports that consistently provided inaccurate information about  ML's reserve formula, and omitted required information on the Leveraged Conversion Trades.  

The claims alleged in the OIP are barred, in whole or in part, because Mr. Tirrell relied in good faith upon the judgment of professionals, including ML's and Bank of America's in-house counsel, outside counsel, compliance and accounting professionals, and legal consultants as to matters that he reasonably believed were within such persons' professional or expert competence.

"Tirrell does not intend to rely" in presenting this defense "on documents that have been withheld by Bank of America or any other party as privileged. Mr. Tirrell does not hold, and is not asserting, a personal privilege over any documents."

[I]t contacted Bank of America and learned that the latter would rely on privilege and instruct any inside or outside counsel not to answer any questions about any legal advice given to Bank of America personnel regarding the allegations in the OIP. Mot. at 3. The Division asserts that Tirrell is improperly attempting to assert an advice-of-counsel defense "while shielding such advice and any communications relating thereto from disclosure." Id. at 4. Noting that Tirrell cannot establish the elements of an advice-of-counsel defense, id., and relying on United States v. Wells Fargo Bank, N.A., 132 F. Supp. 3d 558 (S.D.N.Y. 2015), it argues I should bar Tirrell's reliance defense, id. at 6-7.² 

Footnote 2: The court in Wells Fargo held that a litigant cannot rely on an "advice-of-counsel defense that requires disclosure of his employer's privileged communications where the employer will not waive the privilege." 132 F. Supp. 3d at 561, 566.

SIDE BAR: United States v. Wells Fargo Bank, N.A. (SDNY 2015), as set forth in the introductory portion of the Opinion and Order: 

This case-a civil fraud case brought by the United States against Defendants Wells Fargo Bank, N.A. ("Wells Fargo" or the "Bank") and Kurt Lofrano (together with the Bank, "Defendants") -- presents an issue of first impression within the Second Circuit: whether, or under what circumstances, an employee may pursue an advice-of-counsel defense where doing so requires disclosure of privileged communications and his employer owns the privilege and refuses to waive it. In a prior opinion, the Court held that Lofrano's mere declaration of his intention to assert an advice-of-counsel defense -- without more -- does not impliedly waive the Bank's privilege. See United States v. Wells Fargo Bank N.A., No. 12-CV-7527 (JMF), 2015 WL 3999074 (S.D.N.Y. June 30, 2015) ("Wells Fargo I "). The Court indicated, however, that Wells Fargo might waive the privilege by failing to object to Lofrano's reliance on privileged communications or that, in any event, Lofrano's "right to present a defense could conceivably overcome Wells Fargo's right to maintain its privilege." Id. at *3. 

Wells Fargo now moves for a protective order precluding Lofrano from disclosing any privileged communications (Docket No. 274) -- thereby confirming that it does object and squarely presenting the question of whether Lofrano's right to present the advice-of-counsel defense is sufficient to overcome the Bank's privilege. For the reasons stated below, the Court concludes -- in light of binding Supreme Court precedent -- that it does not and that Lofrano may not assert an advice-of-counsel defense over Wells Fargo's objection. The Court recognizes that that result is arguably harsh in this particular case, as it may well deprive Lofrano of his best defense to liability for tens of millions of dollars. It is, however, the price that must be paid for society's commitment to the values underlying the attorney-client privilege. Additionally, upon closer analysis, the result may be less harsh than first appears because, in the absence of a robust commitment to the privilege, the communications at issue may never have been made -- or Lofrano might not have been made privy to them. Moreover, in many cases, companies in Wells Fargo's position may choose to either waive the privilege or, if they choose not to do so for broader institutional reasons, indemnify their employees and pay the price themselves. 

United States v. Wells Fargo Bank, N.A., 132 F.Supp.3d 558, 559 (S.D.N.Y. 2015)

[O]ther "professionals from various disciplines" reviewed aspects of the trade. Id. at 7. Tirrell argues that he "relied on" those other professionals and certain "external advisers to do their jobs and determine whether the trade was appropriate based on their areas of expertise." Id. He thus asserts that he "relied on those professionals to carry out their responsibilities appropriately and reasonably took comfort from knowing that Merrill Lynch thoroughly reviewed the . . . trade." Id. at 9. And he says that he "relied on the business unit to accurately and fully describe the structure and purpose of the . . .Trade as part of his assessment of" it. Id. at 10.

As Tirrell argues, the Division's argument that he cannot establish the elements of advice-of-counsel defense misses the point. He "is not making that argument." Opp'n at 10. Tirrell has specifically disclaimed reliance on any communication or advice from counsel. Id. at 2-3. Indeed, he argues that he did not rely on what lawyers and other professionals advised or told him; rather he relied on the fact lawyers and other professionals approved or did not object -- apparently based on their professional judgment -- to the leveraged conversion trade as it related to their fields of expertise. Id. at 9-10.  

Whatever the strength or relevance of Tirrell's proposed defense might be, matters that I am not currently in a position to determine, the defense does not depend on advice Tirrell received from counsel. Given Tirrell's express waiver, however, he will not be permitted to rely on the assertion that he took action or refrained from taking action based on advice, from counsel or any other professional, that his action or inaction would be lawful. If Tirrell testifies during the hearing that he relied on a previously undisclosed communication with any counsel or professional or previously undisclosed advice from any counsel or professional, I will entertain an appropriate motion from the Division regarding that testimony.    

• OIP
• Advice of Counsel
• Reliance
• Reliance Defense
• Unprecedented Violations
• SEC
• Division of Enforcement
• Tirrell
• Leveraged Conversion Trades
• Reliance On Counsel
• In House Counsel
• Outside Counsel
• Privilege