Pressure builds on BofA's Ken Lewis

(Fortune) -- Questions about whether Bank of America breached its duties to shareholders come at an inconvenient time for embattled CEO Ken Lewis.

According to documents released Thursday by a top state prosecutor, the BofA (BAC, Fortune 500) chief met repeatedly late last year with federal regulators and the bank's board to discuss the deteriorating condition of Merrill Lynch, the struggling brokerage BofA had agreed to acquire in September.

At one point, according to an account released by New York Attorney General Andrew Cuomo, Lewis told then-Treasury Secretary Henry Paulson that BofA was considering backing out of the Merrill deal -- only to relent when Paulson said regulators, fearing a financial sector collapse, might respond by removing Lewis and his directors.

The Cuomo report certainly won't go down as a shining moment for a government that has twisted itself in knots claiming it wasn't pulling the strings at financial firms it invested in.

But worse, to some observers, is BofA's failure to disclose any of this information to its shareholders -- regardless of Lewis's claim he was being leaned on by Paulson.

The report could increase the pressure on Lewis as he and some members of the BofA board face re-election next week at the company's annual shareholder meeting.

"It's hard for me to believe the Treasury and the Federal Reserve would tell Ken Lewis to violate securities laws," said Jonathan Finger, a longtime BofA investor who has been critical of Lewis' penchant for empire building at shareholder expense. "Regardless of the pressure he may have felt, Ken Lewis still had a duty to protect shareholders and disclose relevant information."

Cuomo wrote in a letter to congressional leaders and other top federal officials Thursday that facts unearthed in his investigation raise questions about "corporate governance and disclosure practices at Bank of America."

BofA dismisses questions about its handling of the deal.

"We believe we acted legally and appropriately in the Merrill Lynch transaction," spokesman Scott Silvestri said.

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