Bank of America's Last, Best Hope

James A. Cohen in The Street, May 19, 2011

Media Source

NEW YORK (TheStreet) -- As a big bank with big legal problems, the choice for Bank of America(BAC) couldn't have been too complicated: hire Gary Lynch.

It worked for Credit Suisse (CS) in 2001, when the bank was reeling from cases accusing the firm of getting kickbacks from clients to whom it dished out shares of hot technology IPOs.

Also for Morgan Stanley(MS), whose legal team was in a shambles, having lost a whopping $1.5 billion verdict to Ronald Perelman involving appliance maker Sunbeam Products in 2005. Lynch took over the legal team in 2006, and Morgan Stanley had the verdict overturned in 2007. 

Lynch is probably best known, however, for successfully bringing government cases against Ivan Boesky and junk bond pioneer Michael Milken in the 1980s while he was head of enforcement at the Securities and Exchange Commission. The SEC tried and failed to bring cases against Milken twice before Lynch, who is expected to join Bank of America in the fall and did not respond to a request for comment for this article, ultimately succeeded.

"He's got, in terms of background, the ideal experience set to help a large complex financial services firm like Bank of America," said William McLucas, partner at law firm WilmerHale. McLucas worked for Lynch at the SEC, before eventually becoming head of enforcement himself.

Portraits of Lynch in his SEC days, in the books "Den of Thieves" and "Eagle on the Street," suggest a determined-but-merciful enforcer. While pursuing a historic case against Milken, for example, and helping the Justice Department win its criminal conviction of the financier, he showed surprising restraint--especially considering he was only in his mid-30s at the time.

"Lynch said that despite the breadth of Drexel's violations and its belligerent attitude, the decision had been made not to strip it of its license to do business," wrote David Vise and Steve Coll in "Eagle on the Street." Drexel nonetheless ended up filing for bankruptcy about the same time Milken pled guilty to various securities and tax law violations.

Stanley Sporkin, who preceded Lynch as SEC enforcement chief and spent several years as his supervisor, says Lynch was willing to come up with creative solutions to avoid shutting down firms that had broken the rules.

"With many law enforcement people, it's kick 'em and, you know, that's it: put 'em out of business," Sporkin says "That impressed me, that he was willing to work with companies and not look at it only with a law enforcement mentality."

That style was in marked contrast to that of former New York Mayor Rudy Giuliani, who also led the criminal cases against Milken and Boesky as the U.S. Attorney for New York's Southern District. Giuliani favored attention-getting tactics like having federal agents escort Wall Street executives out of their offices in handcuffs. In at least one instance, the charges were eventually dropped, according to a 2007 report by Bloomberg News.

Friends of Lynch say he has always favored a low-key approach.
"In my professional life, to include the 7 years I served as an officer in the Marine Corps, there is no one I hold in higher regard than Gary Lynch when it comes to character and integrity," says Pat Patalino, who worked for Lynch at Davis Polk, Credit Suisse and Morgan Stanley, before taking his current job as general counsel of Baron Capital.

Character and integrity is certainly something Bank of America would like to have in its corner at the moment, as it has so far been unsuccessful in assuring investors it has a handle on mortgage-related legal headaches, many of them the legacy of its 2008 acquisition of Countrywide Financial.

"I don't know of anyone that's been particularly impressed with how [Bank of America CEO Brian] Moynihan has been running the company," says Gary Townsend, portfolio manager and founder at Hill Townsend Capital, which owns Bank of America shares on the theory that they are too cheap to pass up.

"Now that they need someone to advise the general counsel--maybe they do. It suggests to me that maybe the general counsel is deficient in some particular, but perhaps this guy is going to be more of a lobbyist with people that he knows quite well, and can be an effective advocate for Bank of America in dealing with attorneys general and other constituencies," Townsend says.

Advocacy certainly is something Lynch brings to the table, according to John Coffee, securities law professor at Columbia University.

"I think his experience is in the diplomacy of structuring settlements and in dealing on a foreign minister to foreign minister basis with effectively other heads of state at regulatory agencies and I think there he brings great credibility. If he's coming to a meeting, the attorney general of state "X" should be flattered," Coffee says.

James Cohen, a law Professor at Fordham University, sees another reason Lynch may have been hired.

"He gives the management insurance against being criticized by the board. How could we have gotten better than Gary Lynch? I'm not saying he doesn't bring anything to the table in terms of substance. I'm not saying that at all. But from a political point of view or a job retention point of view, management wants that big name so they can say we hired the best and the best solved the problem."

Lynch, like Wilmer's McLucas, is one of a long line of Wall Street enforcement chiefs who have gone on to help defend the industry they once policed. Deutsche Bank (DB)general counsel Richard Walker and JPMorgan Chase(JPM) are two other examples.

The "revolving door," between Wall Street and its regulators has long drawn criticism, though especially in the wake of the financial crisis.

Wilmer's McLucas may be more better protected from such criticism since he has overseen internal investigations at WorldCom, Enron and UnitedHealth in the wake of scandals at those companies. Lynch did similar work in the 1990's for companies including Bausch & Lomb Inc., Kidder Peabody, and Mattel, Inc.(MAT), though many of his reports were not made public as McLucas's were.

Regardless, McLucas argues much of the criticism of the "revolving door," is too simplistic.

"An enormous percentage of what we do out here, which nobody ever sees, including the government, is basically ensure and advise people to do things the right way, and that runs the gamut from disclosure advice to counsel in accounting matters to advising boards as to how they ought to conduct themselves, and I think the idea that having been in the government and now being in private practice you've sort of betrayed your original commitment and sold your soul is just not true. It is simply not true," he says.