updated 9/9/2009 6:09:16 PM ET 2009-09-09T22:09:16

Federal regulators on Wednesday defended their proposed $33 million settlement with Bank of America over bonuses paid by Merrill Lynch. But the Securities and Exchange Commission said the bank didn't waive attorney-client privilege, making it impossible to establish if its executives knowingly breached securities laws.

Bank of America Corp., in its own legal filing, insisted that it didn't waive the privilege and said "there is no evidence that any individual is culpable."

The SEC reaffirmed as fair, reasonable and adequate its proposed settlement over the bonus affair, which arose after Bank of America agreed to buy Merrill Lynch & Co. for $50 billion in a hastily arranged deal a year ago. The SEC also said there was no factual support to charge individual Bank of America executives in the case.

U.S. District Judge Jed Rakoff in Manhattan has delayed approving the proposed settlement. He had asked for filings by Wednesday from the SEC and the bank so that he can make a decision.

Bank of America said in its new court filing that it agreed to settle the SEC's charges to avoid lengthy litigation at a time of great market uncertainty.

On Aug. 25, Rakoff ordered the SEC to explain why it didn't investigate whether executives at Bank of America misled shareholders about the Merrill bonuses. After a period of review, Rakoff could rule on the settlement or order additional hearings.

Bank of America, meanwhile, was a day closer to facing potential charges from the New York attorney general's office regarding the Merrill acquisition.

Both Rakoff and New York Attorney General Andrew Cuomo's office have questioned whether the bank knowingly hid details about Merrill's financial problems and bonus payments from shareholders ahead of a vote to approve the deal.

Cuomo's office asserted that Bank of America is using the attorney-client privilege to avoid providing details for the attorney general's investigation into the Merrill acquisition.

On Tuesday, Cuomo's office said it is nearing a decision on whether to file fraud charges against Bank of America or any of its executives under a New York state law called the Martin Act. It has given the bank until Monday to provide those details.

The bank said in a statement it has been cooperating with the Cuomo's investigation and that its disclosures to shareholders complied with securities laws.

Charlotte, N.C.-based Bank of America, one of the nation's largest banks, acquired Merrill on Jan. 1 in a shotgun merger in September 2008 at the height of the financial crisis. It was later revealed that Merrill, with the knowledge of Bank of America executives, accelerated $3.6 billion in bonus payments before the deal was closed.

In seeking approval to buy Merrill Lynch, Bank of America told investors that Merrill would not pay year-end bonuses without Bank of America's consent. But in its complaint filed Aug. 3 in federal court in Manhattan, the SEC said Bank of America had already authorized Merrill to pay up to $5.8 billion in bonuses and didn't share that information with shareholders. That rendered a statement Bank of America mailed to 283,000 shareholders of both companies about the Merrill deal "materially false and misleading," the SEC said.

Merrill wound up paying $3.6 billion in bonuses in 2008, even though it lost $27.6 billion that year, a record for the firm. Those losses affected Bank of America's bottom line after its takeover of the troubled investment bank was completed.

The SEC said it's impossible to establish whether Bank of America executives knowingly violated securities laws because the terms of the bank's takeover of Merrill — including the bonus payments — were laid out in documents prepared by outside attorneys for the two companies.

The attorneys were mainly responsible for drafting the Bank of America disclosure filings and the bank didn't waive the attorney-client privilege, the agency said.

"The SEC does not believe that there has been a waiver of the attorney-client privilege by Bank of America," the new filing says, and "the investigative record does not provide a factual predicate to charge individuals."

Bank of America, among the banks hardest hit by mounting loan losses and the recession, is one of the largest recipients of aid under the government's financial bailout program. It has received $45 billion, including $20 billion in January, and guarantees to protect it against losses on hundreds of billions of dollars in loans to help it absorb mounting losses at Merrill. The bank has said that taxpayer money would not be used to pay the SEC settlement.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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