Jan. 30 (Bloomberg) -- New York Attorney General Andrew Cuomo is examining whether securities laws were violated when Merrill Lynch & Co. paid bonuses just before it was acquired by Bank of America Corp. and may seek fines or recovery of the payments, a person familiar with the matter said.

Cuomo also wants to know what Bank of America Chief Executive Officer Kenneth Lewis knew about the bonuses, estimated at $4 billion, and about Merrill’s surprise $15 billion net loss in the fourth quarter, the person said. Lewis, 61, fired Merrill’s CEO John Thain this month after the losses required more federal bailout aid to cope with the losses.

The attorney general’s office is looking at whether the companies’ shareholders had all necessary information about Merrill’s finances and whether U.S. bailout loans to Bank of America were used properly, the person said, asking not to be identified because the investigation, at a preliminary stage, is confidential and may not lead to enforcement.

President Barack Obama said yesterday that it was “shameful” that Wall Street banks had paid out $18.4 billion in bonuses as taxpayers bailed out companies and the U.S. recession deepened. He called the bonuses “the height of irresponsibility.”

The Wall Street Journal reported the expanded nature of Cuomo’s investigation yesterday.

Thain, 53, and Bank of America’s chief administrative officer were subpoenaed this month by Cuomo. The attorney general wants to find out what Thain told his firm’s directors and Bank of America officials about ballooning losses in December, the person said. Thain was in charge of trading, investment banking and brokerage operations at the combined company, which is based in Charlotte, North Carolina.

‘No Longer’

“No longer will this country stand for wasteful spending of tax dollars on bonuses for executives whose companies have taken huge losses and required taxpayer bailouts,” Cuomo said yesterday in a statement about Wall Street bonuses at firms that received funds from the Troubled Asset Relief Program, or TARP.

Cuomo is now looking at whether the companies’ handling of the losses and Merrill’s bonuses -- paid to all eligible workers in December instead of their usual date in January -- may have violated New York securities laws, the person said. Any violation might warrant fines or recovery of bonuses improperly granted.

In October, Cuomo sent letters demanding data about bonuses from Citigroup Inc., JPMorgan Chase & Co. and seven other banks that qualified for TARP funds. The request came a day after congressional investigators asked the banks to justify bonuses.

Hard to Recover

Christopher J. Clark, a former U.S. prosecutor who now represents white-collar defendants for the firm Dewey & LeBoeuf LLP in New York, said Bank of America’s status as a for-profit company would make it difficult for Cuomo to succeed if he decides to go after the bonuses. Cuomo has authority to regulate unreasonable pay at not-for-profit entities.

“I don’t think the New York Attorney General’s office has a very solid legal claim,” Clark said today in an interview.

Treasury has the authority under legislation that created TARP to issue regulations that claw back excessive executive compensation, and that may give the administration some authority to go after excessive pay, said Larry Hamermesh, a corporate law professor at Widener University in Wilmington, Delaware.

The Treasury could require companies that request additional funds to repay excessive bonuses as a condition of the further financing, Hamermesh said.

Charles Elson, director of the University of Delaware’s John Weinberg Center for Corporate Governance, said it would be “very difficult” for the Treasury to recoup bonuses.

Contractually Made

“Usually these bonuses were contractually made and paid out based on a formula unless you can show bad faith, some intentional misconduct,” Elson said. “These are situations where monies were paid under a contract, and the worst you can accuse these people of is making very bad decisions.”

Cuomo, a Democrat, is cooperating with Special Inspector General Neil Barofsky in a federal probe of executive pay at banks that got TARP money. Piggybacking on that investigation gives Cuomo’s office more auditing power than it normally has because state and federal investigators will share information, the person said.

Scott Silvestri, a Bank of America spokesman, declined to comment. Jesse Derris, Thain’s public relations representative with the firm Sunshine, Sachs & Associates, declined to comment.

Thain said in a Jan. 25 memo that the size and timing of the bonus payments “were all determined together with Bank of America.” The bonus pool was 41 percent less than the previous year and was “substantially less than the amount allowed under our merger agreement,” Thain said in the memo.

In December, Thain agreed to forgo his year-end bonus after he had earlier suggested a payment of $5 million to $10 million in conversations with board members, a person familiar with the matter said at the time.

“John Thain and the Merrill Lynch compensation committee made the decision on the amount and timing of year end compensation at Merrill Lynch,” Bank of America said Jan. 28 in a statement. “We had no legal right to challenge it.”

To contact the reporter on this story: Erik Larson in New York at elarson4@bloomberg.net.

Last Updated: January 30, 2009 14:05 EST