(Updated with BofA reaction)NEW YORK ( TheStreet) -- Following weeks of vacillation among Bank of America ( BAC - Get Report), the Securities and Exchange Commission and a prickly federal judge, New York Attorney General Andrew Cuomo seems poised to file charges against the bank related to its problematic acquisition of Merrill Lynch. But it's unclear whether the crusading AG will be able to cut through BofA's defense if the bank refuses to cooperate with his requests. In a letter on Tuesday, David Markowitz, head of Cuomo's investor protection bureau, asserts that BofA is "improperly using the attorney-client privilege as both a sword and a shield" in order to avoid charges. In response to questions about its decisions related to the Merrill deal, BofA has said that they were vetted by counsel or based on counsel's advice, but then followed that up by saying lawyers couldn't be questioned because conversations were privileged. Markowitz demands that the firm provide more information or face charges "without giving credit to the advice of counsel defenses that Bank of America has not permitted us to test." Late on Wednesday, BofA responded in a strongly worded letter to Cuomo in which it called suggestions of wrongdoing "spurious," according to The Wall Street Journal. The bank defended its legal right not to disclose losses prior to the Merrill deal's close and said it was not taking "unfair advantage" of its assertion of privilege. The Charlotte, N.C.-based bank may face charges over four key issues, depending on Cuomo's success in obtaining information. The bank knew about Merrill's escalating losses, but didn't provide shareholders with that critical information ahead of their vote to approve the deal. Management also didn't disclose a $2 billion goodwill writedown on subprime investments ahead of the vote. Following shareholder approval of the deal, BofA didn't disclose that it was considering the invocation of a material adverse change, or MAC, clause because of how poorly Merrill was faring. Top officials including Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke pressured Bank of America not to make such a move, arguing that it would cause more harm than good, both for the company and the broader markets.
Still, Markowitz notes that it took BofA over a month to disclose Merrill's "dire financial situation" and never disclosed its consideration of a MAC clause nor its discussions with regulators that were fraught with conflicts of interest. Finally, Cuomo's office takes issue with BofA's allowing Merrill to distribute bonuses on an accelerated basis, while the firm was facing escalating losses, and BofA was about to accept $20 billion more in federal funds for the deal. The SEC provided support to Cuomo's arguments on Wednesday afternoon, in a document provided to federal Judge Jed Rakoff in response to some of BofA's stated claims. Rakoff has so far refused to approve a $33 million settlement reached by the two parties, pointing out the mental acrobatics one must go through to understand its defense. The SEC seemed to concur, citing various contradictions and illogical arguments within the bank's stated defense. For instance, Bank of America claims that any "reasonable" shareholder should have known that it planned to distribute bonuses because it was common practice, was indirectly referred to in unspecific merger documents and was reported in the press. But it also claims that it couldn't provide specifics on the bonuses at the time because such disclosures would have harmed BofA and Merrill competitively. "The experts cannot have it both ways," Rosenfeld says in the document, "and this contradiction exists for a simple reason: Their position is incorrect." Overall, Rosenfeld says BofA's arguments are flawed because they "run counter to the fundamental principle that it is the responsibility of the issuer company to provide shareholders with an accurate and non-misleading proxy statement so that shareholders can exercise their vote in an informed manner.
One key figure who is sure to factor into the case is then-General Counsel Timothy Mayopoulos. Markowitz outlines testimony in which Mayopoulos and a slew of executives -- Chief Financial Officer Joe Price, chief risk officer Greg Curl, Merrill's former corporate controller Gary Carlin and former accounting chief David Moser -- glance upon significant conversations, but invoke attorney-client privileges as soon as anyone would be pegged with responsibility for crucial decisions. Mayopoulos was swiftly dismissed without an explanation the day BofA informed its board about Merrill's losses, according to the New York Times. Bank of America did not have any immediate statement on Wednesday in response to the SEC document or Cuomo's attack. However, Rochdale Securities analyst Richard Bove, a frequent critic of these proceedings, did come to the bank's defense. "Bank of America is now bogged down in a number of legal entanglements that are distracting management and costing shareholders money," Bove wrote in a report on Wednesday. "Management is involved in this situation because it took actions that meaningfully benefitted the company and its shareholders. Beyond this, the actions that management took benefitted the nation, its economy, and its financial system." Bove warned that BofA may have to divest itself of Merrill Lynch as a result of the negative publicity and costly litigation, although that may not be the case. If Bank of America does allow its lawyers to detail their advice, it will provide a scapegoat who can be fired, or at least figuratively tarred and feathered.
If Bank of America refuses to cooperate, the outcome is less clear. Cuomo's office can still pursue charges and few in the regulatory and judicial world appear sympathetic to BofA's claims. But if the bank continues to shield itself with an attorney-client privilege defense, it's not certain Cuomo's crusaders will have the legal standing to stab anyone with a sword. -- Written by Lauren Tara LaCapra in New York.