Prosecutors are investigating whether the early payment of bonuses at Merrill Lynch last year gave the bank's traders an incentive to mark down the value of their trading positions in the last days of December, the Financial Times reports, citing people familiar with the probe.

New York Attorney General Andrew Cuomo has been investigating the timing of $3.6 billion in bonuses Merrill paid to employees in December. Cuomo's office is trying to determine if Merrill and Bank of America ( BAC) failed to provide adequate disclosures to shareholders about them and the more than $15 billion in losses Merrill incurred during the fourth quarter.

Bank of America acquired Merrill on Jan. 1.

The Financial Times reports Cuomo's office, in a twist to the probe, is now considering whether the early payments encouraged Merrill traders to mark down their portfolios, perhaps making it easier for them to post gains in January.

Three former Merrill executives told the newspaper that traders made such changes to their books in late December. The executives, however, said the markdowns weren't outsized, and weren't an effort to "kitchen sink" the quarter, a strategy in which positions are marked down to make later results look better.

Cuomo and Rep. Barney Frank on Monday sent a joint letter to Bank of America CEO Ken Lewis demanding he immediately disclose details about individual bonuses paid to Merrill employees.
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