Bank of America, ex-CEO Lewis settle NY lawsuit over Merrill

(Adds comments from lawyers for Lewis, Price)

By Karen Freifeld

NEW YORK, March 26 (Reuters) - Kenneth Lewis, who turned Bank of America Corp into the nation's largest bank but also saddled it with enormous losses tied to mortgages, has settled a lawsuit accusing him of deceiving investors about one of his biggest acquisitions: Merrill Lynch & Co.

Lewis, the bank's chief executive from 2001 to 2009, will pay $10 million to resolve claims by New York Attorney General Eric Schneiderman that he misled shareholders and the government in order to complete the merger, which closed on Jan. 1, 2009, according to a copy of the agreement obtained by Reuters.

New York accused Lewis of concealing Merrill's mounting losses from Bank of America shareholders prior to a Dec. 5, 2008 vote on the merger, and manipulating the U.S. government into providing an extra $20 billion bailout by falsely claiming that he would back out of the merger without the money.

As part of the agreement, Lewis, 66, will also be barred for three years from serving as an officer or director of a public company. A spokeswoman for Lewis's attorney said the bank would cover his payment.

Bank of America will pay $15 million to resolve its portion of the lawsuit by Schneiderman, who inherited the case from his predecessor, Andrew Cuomo, now New York's governor. The bank also will adopt reforms, such as creating a special committee to review large acquisitions, according to a separate settlement agreement obtained by Reuters.

Both payments would cover the costs of Schneiderman's investigation, and neither Lewis nor Bank of America are admitting wrongdoing or paying damages.

Nonetheless, the settlement with Lewis, who has kept a low public profile since leaving Bank of America, would mark one of the rare times that an executive at a major U.S. bank has been held legally responsible in a case alleging wrongful conduct linked to the 2008 global financial crisis.

"Individuals - not just corporations - should be held accountable for their actions," Schneiderman said in a statement confirming the settlements.

Attorney Bruce Yannett, who represents Lewis, said in a statement that the former executive was pleased to put the case behind him.

"Mr. Lewis is proud of the role he played in helping the U.S. banking system survive a very challenging period in its history," the statement said.

"The bank relied on experienced legal counsel ... with regard to what needed to be disclosed to shareholders," the statement said, adding that the Merrill acquisition has proven an "unmitigated success" for Bank of America.

A spokesman for Charlotte, North Carolina-based Bank of America, now the second-largest U.S. bank by assets, declined to comment.

A third defendant, former Bank of America chief financial officer Joe Price, has yet to settle.

"We understand the bank and Ken Lewis ... have accepted terms from the New York attorney general to put the matter behind them," said Price's lawyer, William Jeffress. "Joe Price made a different decision and we continue to defend the case."

RED INK

Bank of America agreed to buy Merrill Lynch for an estimated $50 billion on Sept. 15, 2008, the day before Lehman Brothers Holdings Inc went bankrupt, in a hurried merger that won Lewis praise at the time and likely prevented Merrill's demise.

Losses at Merrill, however, mounted ahead of a Dec. 5, 2008 vote by Bank of America shareholders on the merger, ultimately reaching $15.84 billion in the fourth quarter of that year.

Despite the red ink, Merrill paid out $3.62 billion of bonuses, and New York claimed that Bank of America misled shareholders about the timing and criteria for the payouts.

The merger closed six months after Lewis had bought the mortgage lender Countrywide Financial Corp. The two purchases put great stress on Bank of America's balance sheet, and led to an extra $20 billion federal bailout in mid-January, by which time Merrill's losses also became known. The bank had already taken $25 billion from the government. The $45 billion has since been repaid.

MARTIN ACT

Cuomo had sued Lewis, Price and Bank of America under the Martin Act, the state's powerful securities fraud statute.

The lawsuit came after the U.S. Securities and Exchange Commission had also sued Bank of America over its disclosures about Merrill's losses and bonuses.

That case eventually settled for $150 million, an accord that U.S. District Judge Jed Rakoff in Manhattan approved reluctantly because it did not require Bank of America to address whether it did anything wrong.

A separate $2.43 billion shareholder class action settlement won final approval last year, and was a factor in Schneiderman's decision in January to drop his damages claim.

New York's highest court ruled in 2008 that the attorney general cannot pursue damages for shareholders who have settled a class action, even if they are not made whole.

Bank of America was surpassed as the largest U.S. bank by assets by JPMorgan Chase & Co in 2011.

The case is New York v. Bank of America Corp et al, New York State Supreme Court, New York County, No. 450115/2010.

(Reporting by Karen Freifeld; additional reporting by Jonathan Stempel; Editing by Bernard Orr)