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Pondering Cuomo Vs. Bank of America

New York AG Andrew Cuomo is claiming Bank of America and a pair of its executives acted fraudulently in relation to the Merrill deal, but it's worth asking how he would have handled it?

CHARLOTTE, N.C. (

TheStreet

) -- When considering the swarm of political and legal theater that occurred on Thursday surrounding the

Bank of America

(BAC) - Get Report

-Merrill Lynch merger, it's worth asking: What would Andrew Cuomo have done?

Cuomo, the New York attorney general, is charging Bank of America, and two executives with fraud. He alleges that former CEO Ken Lewis and former CFO Joe Price, who now runs consumer and small business banking, misled investors about Merrill's losses, failed to inform them about bonuses in an adequate timeframe, and misled the government about the possibility that B of A would abandon the deal in a ruse to get $20 billion in additional bailout funds.

"Bank management understated the

Merrill Lynch losses

to shareholders to get shareholders to approve the deal, then overstated their ability to terminate the agreement to get $20 billion from federal government," Cuomo said on Thursday. "That is just a fraud."

Bank of America denied the charges, as did both Lewis and Price, and vowed to "vigorously" defend itself against them.

There are a few questions about Cuomo's case, though, most related to matters that aren't directly addressed in the charges, but are important nonetheless.

First, given Cuomo's cocksure tone about Bank of America's alleged fraudulent misdeeds, one would assume he has evidence that Price and Lewis intended to defraud investors and taxpayers for their own benefit. (If they had done so for the bank's benefit, it would be difficult to argue that they were hurting shareholders.)

But Cuomo is charging the bank and its financial leaders using a Depression-era statute called the Martin Law that doesn't require proof of intent. In fact, the Securities and Exchange determined months ago that there was no evidence that individuals had acted with intent to mislead.

Lewis' attorney, Mary Jo White, said in a statement that Cuomo's case was "based on the very same evidence" as the SEC's. One can argue that the SEC is a toothless regulator, but after the lashing it received from

Judge Jed Rakoff

for not naming those responsible for alleged misconduct, if there were evidence against an individual, it seems likely the SEC would have used it.

Secondly, although in all likelihood the Bank of America-Merrill case will be settled long before it makes it to court, if it

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does

reach the justice system beyond Cuomo, it will be the first high-profile prosecution of a controversial crisis-era situation. It involves not just bankers, but the government, which was intricately enmeshed in crisis-era deals -- especially this one.

Former Treasury Secretary Henry Paulson

and Federal Reserve Chairman

Ben Bernanke

have both admitted to at least advising top Bank of America officials on the Merrill deal. They have denied that their actions were inappropriate, but some would say they put undue pressure on Lewis & Co. to move forward with the deal, and there's certainly room for debate.

And while Lewis ultimately accepted more bailout funds to go forward with the acquisition, he didn't ask for them; Paulson and Bernanke decided to offer them.

In some sense, Cuomo's case is divvying up responsibility for Merrill-related decisions, and he seems to be ascribing none to the government for handing out those federal dollars. The government doesn't usually maintain legal responsibility for corporate deals, but crisis-era deals were obviously a different animal. Treasury and Fed lawyers gave legal advice and and officials predicted that if Lewis didn't go forward, he'd be responsible for a market meltdown.

Why do Paulson and Bernanke not share in the blame, if there is blame to be assigned? Cuomo's complaint names them as participants, and they may be called to the stand, but it's worth asking what evidence he used to determine that their actions were entirely appropriate.

The third issue is one of politics. Cuomo has all but said he is building a platform for a gubernatorial run that may be declared within weeks. As part of that election bid, it appears Cuomo is using populist rage over Wall Street excess to fuel his own popularity. If that sounds familiar, it may be because his predecessor Eliot Spitzer did the same thing, using the same 70-year-old law, a decade ago following the dot-com crash. He was an effective AG, but a less effective governor in his brief tenure, something that voters experiencing deja vu may want to consider as well.

As it stands, no evidence has been presented that Lewis & Co. understated or mischaracterized Merrill's losses at any given time. They didn't publicly update loss estimates -- or planned bonuses -- between the time the deal was announced to the time shareholders voted, but it hasn't yet been proven that they were legally obliged to do so, given the circumstances.

Nor has evidence been presented that Lewis & Co. demanded $20 billion in taxpayer funds to close the deal. The move hurt Bank of America's reputation, hurt shareholders, and ultimately cost both Lewis and Price their jobs. Being some of the company's largest individual shareholders, all the related stock-price declines and dilution has hurt them just as much as anyone else; the difference is that they had a direct hand in making decisions.

Cuomo's statements may be confident and aggressive, but his case is not. It doesn't require proof of intent, and if he had any, he almost certainly would have flaunted it.

If the other Merrill settlements are any indication, Bank of America may be able to escape a lengthy, costly battle by biting the bullet again: Paying a civil penalty, issuing a vague statement that sounds part-apology, part-relief, without admitting to doing anything wrong. If Cuomo is successful, he may saunter into Albany as a hero who brought down greedy Wall Street bankers, without having proven their greed or bad intent.

Ken Lewis was in charge, and

ultimately responsible

for decisions at B of A, and one can argue that he has taken the fall. Shareholders stripped him of his chairmanship, he left the CEO role following months of criticism and external pressure, forfeited his compensation for 2009, and lost a good chunk of his net worth that was tied up in Bank of America stock as a result of the financial crisis, and the Merrill deal.

One can agree or disagree with the decisions made by Lewis, but it would be interesting to know how Cuomo would have handled the same situation, and what the outcome might have been.

--

Written by Lauren Tara LaCapra in New York