March 12 (Bloomberg) -- New York Attorney General Andrew Cuomo accused Merrill Lynch & Co. of misleading Congress about its plan to grant employee bonuses in December.

Congress was told Nov. 24 that the brokerage planned to pay bonuses at the end of the year, while the Merrill compensation committee had determined Nov. 11 to accelerate the payments, the attorney general said yesterday in a court filing.

“These representations, in particular the representation made to the congressional committee on Nov. 24, 2008, were misleading,” Cuomo said in the filing.

Cuomo made the accusation in a state court in Manhattan as part of his investigation into Merrill’s decision to pay $3.6 billion in bonuses just before it was acquired by Bank of America Corp. and as it faced a quarterly loss of $15.3 billion. Merrill allocated $3.62 billion for bonus payments on Dec. 8, according to Cuomo’s filing.

Raymond S. Calamaro, a Merrill Lynch lawyer, said in a Nov. 24 letter to U.S. Representative Henry Waxman that the bank operates on a calendar-year basis and makes bonus decisions at year end. Thus “incentive compensation decisions for 2008 have not yet been made,” he wrote. The letter was included in Cuomo’s filing.

John Finnegan, chairman of the Merrill compensation committee, said in testimony to Cuomo that then-Chief Executive Officer John A. Thain had set out a timetable for bonuses about two weeks earlier, on Nov. 11, Cuomo said in court papers.

The attorney general also said Merrill employees may have written down the bank’s holdings after the bonuses were set, leading to losses that were larger than expected.

Fourth-Quarter Loss

Less than a week after Merrill decided on its bonuses, it found $7 billion in fourth-quarter losses in addition to the $8 billion it already anticipated, Cuomo said in court papers.

“It appears that some of these losses may have been booked by Merrill employees who marked down their portfolios only after their 2008 bonuses were set,” Cuomo said in the filing.

The attorney general was responding to Bank of America’s motion to intervene in an investigation of $3.6 billion in Merrill bonuses, in an effort to stop public disclosure of who received the bonuses and how much they got.

Cuomo went to court last month to compel Thain to reveal the data. A New York judge scheduled a hearing for March 13. Cuomo also subpoenaed Bank of America, which acquired Merrill in January.

“Bank of America has cooperated with the attorney general’s investigation into Merrill Lynch bonuses and will continue to do so,” the bank said yesterday in a statement. “Regarding the bonus information requested, Bank of America has continually offered to provide that information subject to reasonable confidentiality.”

Business Secrets

In a court filing last week, Bank of America said it would suffer “grave and irreparable harm” if the information was made public. Publishing the data would provide a “road map” revealing which business lines the banks believe to be most valuable and enable competitors to poach the bank’s top talent, the bank said.

In excerpts of testimony filed yesterday by Cuomo, Bank of America CEO Kenneth Lewis said there was talk of Thain’s separately getting a bonus of about $40 million tied to the Merrill acquisition.

“He was told very strongly that you should not do that,” Lewis said. “You would damage yourself with the Bank of America board if you do that, and if you ever wanted a chance to be in the running for my job, then that would eliminate it.”

Cuomo said that after Bank of America told Thain that its board of directors would strongly disapprove of the eight-figure bonus Thain “was persistently seeking,” the CEO withdrew his request for a bonus.

No Bonus Request

“The only bonus number that Mr. Thain presented to the board for himself was zero,” said Jesse Derris, a spokesman for Thain.

Cuomo said he is investigating whether certain losses were “fraudulently concealed until after bonuses were awarded.” Merrill on Jan. 16 announced a fourth-quarter loss of $15.3 billion.

The “gargantuan unexpected losses” didn’t prompt Merrill to reconsider its bonuses, the attorney general said. He needs to learn why the “11th hour payments” were made, he said in the court papers.

Cuomo also said that, contrary to what it has said, Bank of America could have influenced “if not controlled” the timing of the Merrill bonuses.

Bank of America Chief Financial Officer Joe Price on Dec. 14 advised Lewis that Merrill’s finances “had seriously deteriorated at an alarming rate,” according to Cuomo’s filing.

Acquisition Timing

Lewis in mid-December asked Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson to allow the bank to withdraw from the Merrill acquisition. The regulators refused, citing potential harm to the U.S. financial system.

After the U.S. turned down the request, Bank of America arranged additional financing from the government to help complete the deal.

Merrill and Charlotte, North Carolina-based Bank of America received about $45 billion from the U.S. Treasury’s Troubled Asset Relief Program.

Bank of America earlier this year sold an additional $20 billion in preferred shares to the U.S. as part of the government’s program to boost capital of American banks. The government also agreed to share potential losses on more than $100 billion of loans and subprime-tainted securities at Bank of America.

The case is People v. Thain, 400381/2009, New York Supreme Court, New York County (Manhattan).

To contact the reporters on this story: Karen Freifeld in New York at kfreifeld@bloomberg.net; David Mildenberg in Charlotte, North Carolina, at dmildenberg@bloomberg.net.

Last Updated: March 12, 2009 00:01 EDT