Feb. 8 (Bloomberg) -- Bank of America Corp. and Dexia SA's Financial Security Assurance Holdings Ltd. said they may be sued by the Securities and Exchange Commission after an investigation into bid rigging of financial products sold to local governments.

Financial Security disclosed in a regulatory filing yesterday that it received a so-called Wells Notice on Feb. 4, indicating that the agency's investigators may recommend legal action. Bank of America spokeswoman Shirley Norton said the Charlotte, North Carolina-based bank also got a notice.

FSA was among more than a dozen banks, insurance companies and advisers subpoenaed in November 2006 by the SEC and U.S. antitrust regulators probing whether they conspired to rig the bidding for investment contracts state and local governments buy with bond-sale proceeds. Bank of America last year agreed to cooperate with the Justice Department in exchange for leniency.

``This is a procedural development in an investigation that began 15 months ago and does not necessarily indicate any negative outcome,'' said Betsy Castenir, a spokeswoman for Financial Security. Dexia, the largest European lender to local governments, is based in Paris and Brussels.

When Financial Security first disclosed the investigation in 2006, it said it wasn't aware of any specific allegations of misconduct. Castenir declined to comment further on the investigations, other than to say the company is cooperating with U.S. officials.

Bank of America rose $1.04, or 2.5 percent, to $43.37 yesterday in New York Stock Exchange composite trading. The stock is down 19 percent over the past 12 months. Dexia shares fell 0.7 percent to 15.35 euros in Brussels.

IRS Rules

A Wells Notice informs a company that an investigation by regulators is completed and civil charges may be filed. The notice gives the company the right to explain its conduct in an attempt to persuade regulators that no action is needed.

Local governments use guaranteed investment contracts to invest the proceeds of municipal bond offerings until the money is needed to pay for projects. IRS rules require such contracts to be awarded competitively and prevent state and local governments, or their advisers, from profiting by selling bonds at tax-exempt rates and then investing the cash at higher yields. Such earnings, known as arbitrage, must be repaid as taxes.

The IRS is concerned that unfair bidding on investment contracts may have deprived the federal government of money, much like the so-called yield burning scandals of the 1990s, when Wall Street banks overcharged municipal borrowers for Treasury bond investments.

Black Box Deals

State and local government agencies that sold bonds to create pools of money for projects like low-income housing frequently purchased guaranteed investment contracts with the money. In some cases, such bond sales, sometimes called black-box deals, were never spent on their intended purpose and remained in the accounts, generating fees, until they were used to retire the debt.

FSA and Bank of America were among the six firms that bid for the rights to invest $150 million of bond money for the Housing Authority of Fulton County, Georgia, all of which remained in the investment account until it was later used to buy back the bonds, public records show. New York-based American International Group Inc. was the winning bidder in that case.

The two were also among four bidders for a similar contract with the Industrial Development Authority of Pima County, Arizona, one of more than 20 housing-program bond issues the IRS called ``schemes'' for capturing investment earnings produced by tax-exempt bond deals. Neither won the contract.

To contact the reporter on this story: Martin Z. Braun in New York at bewilliams@bloomberg.net; William Selway in San Francisco at wselway@bloomberg.net.

Last Updated: February 8, 2008 08:16 EST