April 24 (Bloomberg) -- Bank of America Corp. Chief Executive Officer Kenneth D. Lewis may face scrutiny by the U.S. Securities and Exchange Commission for failing to disclose mounting losses at Merrill Lynch & Co. because of pressure from federal regulators to complete the takeover.

“We have been actively reviewing the disclosure surrounding the merger between Bank of America and Merrill Lynch,” said agency spokesman John Nester. “The issues identified in New York Attorney General Andrew Cuomo’s letter are part of our review.”

Cuomo revealed in a letter yesterday to Congress and federal regulators that Lewis testified in December that then- Treasury Secretary Henry Paulson may have threatened to remove the bank’s management and directors if the lender tried to back out of buying Merrill. Lewis said he was instructed by federal officials not to disclose Merrill’s losses, his desire to back out of the merger or the intervention of regulators, according to Cuomo.

Former SEC Chairman Harvey Pitt said he has “no doubt” the agency will investigate. Lewis was obligated to make full disclosure to shareholders even with the regulators’ pressure, Pitt said in a Bloomberg Television interview.

“At least he could have demonstrated he was acting at the request of an official of the U.S. government,” Pitt said.

‘Clear Violation’

The allegations in Cuomo’s letter suggest Paulson and other policy makers may have resorted to breaking securities laws to protect a fragile financial system, according to Peter Sorrentino, a senior portfolio manager at Cincinnati-based Huntington Asset Advisors, which has about $13.3 billion under management and doesn’t own stock in Charlotte, North Carolina- based Bank of America.

“Everyone involved knew that was a clear violation, that’s material non-public information, so basically we just closed the rule book during the crisis and said we don’t care, we need to keep the lights on, and we’ll deal with that manana,” Sorrentino said. “Logic went out the window and they were just acting out of fear,” he said. It was “completely panic mode.”

Both Paulson and Federal Reserve Chairman Ben S. Bernanke said they hadn’t advised Lewis to conceal Merrill’s mounting losses from his shareholders.

Paulson on ‘Disclosures’

“Questions of Bank of America’s disclosures were left up to Bank of America,” Paulson said in statements e-mailed by a spokesperson. “Secretary Paulson does not take exception with the Attorney General’s characterization of his conversation with Ken Lewis. His prediction of what could happen to Lewis and the Board was his language, but based on what he knew to be the Fed’s strong opposition to Bank of America attempting to renounce the deal.”

Lewis testified for four hours in Cuomo’s New York offices on Feb. 26 as part of an investigation by Cuomo of $3.6 billion in bonuses paid at Merrill just before it merged with the bank. Cuomo’s letter was based on Lewis’s recollections of a Dec. 21 conversation with Paulson. Cuomo, in his letter to SEC Chairman Mary Schapiro and members of Congress, said the SEC “appears to have been kept in the dark” about talks between Bank of America and the Fed and Treasury.

Cuomo’s letter didn’t dissuade critics who want the 62- year-old Lewis ousted from the bank’s board at next week’s annual shareholders meeting in Charlotte.

“Mr. Lewis and the board owe their fiduciary obligation to the corporation and shareholders, not to the regulators who reportedly pressed them to close the deal,” Michael Garland, research director at CtW Investment Group, said in an e-mailed statement.

‘Little Choice’

Lewis had little choice but to follow the Fed’s direction, Hugh McColl Jr., Lewis’s predecessor as Bank of America’s CEO, said in a telephone interview yesterday.

“Anyone who has ever run a big national bank knows that when the Fed tells you to do something, you will do it,” McColl said. “It’s an order.”

Former SEC Chairman Arthur Levitt said regulators were obligated to try to rescue the U.S. financial system in pressuring Bank of America to complete its takeover of Merrill Lynch.

Officials including Paulson “had an obligation to do whatever they had to do to preserve the system,” Levitt said today in an interview on Bloomberg Radio. Levitt is a board member of Bloomberg LP, the parent company of Bloomberg News.

Scott Silvestri, a spokesman for Bank of America, defended the Merrill deal in a telephone interview yesterday. “We believe we acted legally and appropriately with regard to the Merrill Lynch transaction,” he said.

Shareholders to Vote

Lewis and the board of the biggest U.S. bank by assets are under fire for not telling shareholders that New York-based Merrill’s fourth-quarter loss was spiraling toward $15.8 billion before they voted to approve the deal in December.

Shareholders are set to cast ballots on April 29 whether to re-elect directors including Lewis and split his roles as chairman and CEO. Some investors are calling for Lewis, CEO since 2001, to resign after a 76 percent decline in Bank of America shares over the past year. The stock, which closed at $8.90 yesterday on the New York Stock Exchange, sold for as little as $2.53 in February. It rose 28 cents, or 3.2 percent, to $9.10 at 4:15 p.m. today in New York Stock Exchange composite trading.

Schapiro said earlier this month that the SEC is already reviewing whether Bank of America violated the law by not disclosing to shareholders that Merrill Lynch employees were set to receive year-end bonuses that totaled $3.62 billion.

SEC’s ‘Difficult’ Position

Former SEC Chairman Christopher Cox, who led the agency at the time of Lewis’s discussion with regulators, declined to comment.

John Coffee, a securities law professor at Columbia University Law School in New York, said Lewis’s testimony to Cuomo’s office puts the SEC in a “very difficult” position.

“They are under some pressure to bring action against Lewis if they feel that Lewis was withholding material information,” Coffee said. Companies can’t argue that it’s in “the national interest” to “withhold material facts from your shareholders,” he said.

Lewis testified that he asked Bernanke to “put something in writing” regarding the U.S. government’s plan to support Bank of America’s acquisition in view of Merrill’s mounting losses.

Board E-Mail

After Bernanke said he would consider the idea, Paulson called Lewis. He said, according to Lewis, “First it would be so watered down, it wouldn’t be as strong as what we were going to say to you verbally, and secondly, this would be a disclosable event and we do not want a disclosable event.”

Attached to Cuomo’s letter was a Dec. 22 e-mail from Lewis to his board. “I just talked with Hank Paulson,” the e-mail reads. “He said that there was no way the Federal Reserve and the Treasury could send us a letter of any substance without public disclosure which, of course, we do not want.”

Paulson said in his statements that his discussions with Lewis “centered on the Fed lawyers’ opinion that the merger contract was binding, and the U.S. Treasury’s commitment to ensuring that no systemically important financial institution would be allowed to fail.”

Fed’s Response

“No one at the Federal Reserve advised Ken Lewis or Bank of America on any questions of disclosure,” said Michelle Smith, a Fed spokeswoman. “It has long been the Federal Reserve’s view that questions of this nature are best addressed by individual institutions and their legal counsel, as they are in a position to understand clearly their obligations and responsibilities,” said Fed spokeswoman Smith.

Senate Banking Committee Chairman Christopher Dodd and other congressional leaders said they would respond to Cuomo’s letter.

“We had suspected there was some behind the scenes work to get Bank of America to buy Merrill,” said Steven Adamske, spokesman for House Financial Services Chairman Barney Frank. “It does show the federal government needs to have greater tools to wind down non-bank institutions.”

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

Last Updated: April 24, 2009 17:35 EDT