On December 21st, when Lewis still considered using a "material adverse event" clause to squash the deal, he told Cuomo, according to the letter, that Paulson threatened to remove the management and Board of Directors of Bank of America. That ended Bank of America's attempts to exit the deal, the letter stated.
"There's no question that this was an extremely heavy handed threat, and there may have been advice here to forget about disclosure obligation which could be seen as aiding and abetting a federal securities law violation," said Professor John Coffee of the Law School at Columbia University.
The letter was sent the day a Wall Street Journal banner headline announced that "Lewis testifies U.S. Urged Silence on the Deal." The Journal account stated that both Paulson and Bernanke barred Lewis disclosure of Merrill's woes because of the potential danger to the financial system. The letter states that Paulson largely corroborated Lewis's account of the threat, and went on to say he made the threat at the behest of the Chairman of the Federal Reserve.
"In an interview with this Office, Secretary Paulson largely corroborated Lewis's account," the letter states. Cuomo alleges that Paulson told his office he made the threat at the behest of Federal Reserve Chairman Paul Bernanke. "According to Secretary Paulson, after he stated that the management and the Board could be removed, Lewis replied, 'that makes this simple. Let's deescalate.' "
In a series of statements, a spokesperson for Paulson largely corroborated Lewis's account to Cuomo but fell short of confirming that Bernanke instructed him to make the threat.
"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," said Paulson's spokesperson.
A previous statement said that "Chairman Bernanke did not instruct him [Paulson] to indicate any specific action the Fed might take," said the spokesperson.
"The point is this: you have to disclose material information to shareholders. You can't violate the law. And that is in effect what appears to come out of this," said Charles Elson Director, of the John Weinberg Center for Corporate Governance.
Bank of America spokesman Scott Silvestri issued a statement saying, "We believe we acted legally and appropriately with regard to the Merrill Lynch transaction."
But Elson said this latest disclosure is quite problematic. "Think of it this way, people bought and sold Bank of America stock for a period, a long period, without being aware of the true state of affairs in the company. The problems with this acquisition were clearly a material event," he said.
This post has been updated.