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New York AG Goes After Bank of America

Updated at 4:07 p.m.

The New York Attorney General's office said Thursday it is filing civil charges against Bank of America and its former CEO Ken Lewis, saying the bank misled investors about Merrill Lynch when it acquired the Wall Street bank in late 2008.

Civil charges were also being filed against Joe Price, the bank's former chief financial officer. Price is now head of the bank's consumer banking division.

At the same time New York Attorney General Andrew Cuomo's office was filing its civil charges, the Securities and Exchange Commission also reached a settlement to resolve charges it brought against Bank of America over similar issues.

Read the lawsuit (PDF)

Bank of America has been accused of failing to properly disclose losses at Merrill and bonuses paid to investment bank employees before the deal closed. Cuomo called Bank of America's actions "egregious and reprehensible" in deceiving not only shareholders, but also the federal government.

On Wednesday, a report said the bank approved $4 billion in compensation to its investment bankers for 2009.

The bank, Lewis and Price are facing charges under New York's Martin Act, a wide-ranging securities law that is aimed at fighting fraud. The charges by Cuomo's office lay the blame for additional government bailouts and alleged deception on the top executives at the nation's largest bank.

The bank received an additional $20 billion in government bailout funds in January 2009 to help offset losses it absorbed as part of the Merrill Lynch acquisition. In December, Bank of America repaid the $20 billion, plus the initial $25 billion it received in government bailout money.

Lewis stepped down as CEO from Bank of America Corp. on Dec. 31 after almost a year of strife that followed the bank's purchase of Merrill Lynch. Price became head of the bank's consumer banking division, taking over for Brian Moynihan, who on Jan. 1.

Moynihan is not under investigation.

Cuomo's office claims Bank of America purposely misled shareholders about the more than $15 billion in losses Merrill recorded in the fourth quarter of 2008 to get the deal completed. Bank of America also hid $3.6 billion in year-end bonuses Merrill employees received as it asked its share holders to approve the deal, the suit alleges.

Bank of America then used the mounting losses to force the government to provide it with the additional $20 billion in bailout money, the lawsuit claims. Lewis has testified before Congress that he was forced by government regulators to complete the deal, even though he had trepidation about doing so.

Richard W. Painter, a law professor at the University of Minnesota and an expert on securities fraud, said the federal government's role in the merger makes the case particularly tricky.

If the Treasury or regulators were aware of any misrepresentation to Bank of America shareholders, then Cuomo will in effect be going after Lewis, Price and the bank "with the federal government as an accomplice," Painter said.

"The question is going to be: Where was the government when all this is going down and is anyone going to hold the government accountable if they did sign off on this?" he added.

Bank of America spokesman Robert Stickler said, "We are disappointed and find it regrettable that the NY AG has chosen to file these charges, which we believe are totally without merit,"

"The evidence demonstrates that Bank of America and its executives, including Ken Lewis and Joe Price, at all times acted in good faith and consistent with their legal and fiduciary obligations," Stickler said. "In fact, the SEC had access to the same evidence as the NYAG and concluded that there was no basis to enter either a charge of fraud or to charge individuals."

Mary Jo White, Lewis' attorney, said in a statement that Cuomo's decision to sue was "a badly misguided decision without support in the facts or the law." Lawyers for Price said the attorney general's allegations were "flatly contrary to the evidence."

Tony Plath, a finance professor at the University of North Carolina at Charlotte, said the charges create a "serious distraction for the future of the business."

Bank of America agreed to pay $150 million to shareholders to settle the SEC charges. The agreement still must be approved by U.S. District Judge Jed S. Rakoff.

In September, the bank and the government agreed to a $33 million settlement only to have Rakoff .

Stickler confirmed that the bank won't not be going to trial with the SEC on their charges, assuming the settlement is approved. The trial was scheduled for March 1.

Rakoff called the first deal a breach of "justice and morality" and ordered the case to go to trial. Rakoff wrote that the $33 million settlement was "done at the expense, not only of the shareholders, but also of the truth."

A hearing about the new settlement is scheduled for Monday afternoon.

Stickler said the company and the executives will vigorously defend themselves against the attorney general's charges.

Bank of America stock fell 62 cents, or 4 percent, to $14.91 in afternoon trading. Its losses were in line with other banking companies as the overall stock market plunged on economic concerns.