Sept. 9 (Bloomberg) -- Bank of America Corp.’s securities unit must defend a lawsuit accusing the firm of helping Lancer Group founder Michael Lauer defraud at least 20 investors of almost $550 million, a judge ruled.

U.S. District Judge Shira Scheindlin in New York denied a request by the unit of Charlotte, North Carolina-based Bank of America to dismiss the suit. The judge didn’t rule on the merits and said only that the plaintiffs offered enough proof to proceed against the firm, which served as Lancer’s prime broker and custodian of funds.

Evidence submitted by the plaintiffs “would permit a reasonable jury to infer that BAS had actual knowledge of the underlying fraud,” Scheindlin wrote in a Sept. 4 opinion.

Last September, Lauer was found liable in a U.S. Securities and Exchange Commission lawsuit claiming he orchestrated one of the biggest U.S. hedge-fund frauds by overstating valuations from 1999 to 2002. In April, he pleaded guilty in Miami to participating in a scheme to manipulate trading of stocks owned by its hedge funds, the U.S. said.

Larry Di Rita, a spokesman for Bank of America, didn’t immediately return a call seeking comment. The lawsuit involves claims of 96 investors. The judge ordered that the suit initially proceed on the claims of 20 plaintiffs.

The plaintiffs say Lancer and Lauer provided Banc of America Securities with fraudulently inflated stock and warrant prices that the bank then included in reports and statements to the funds’ accountant and administrators, even though the bank knew the prices were fraudulent.

Investors including the Pension Committee of the University of Montreal Pension Plan also have sued Lancer’s former auditor and ex-directors and fund administrators.

The case is the Pension Committee of the University of Montreal Pension v. Banc of America Securities, 05-cv-9016, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: David Glovin in New York federal court at dglovin@bloomberg.net.

Last Updated: September 9, 2009 12:10 EDT