OK, we all know the story, Bank of America bought Merrill Lynch, but before the deal closed, they discovered that they had uncovered a toxic waste dump and bonus mill, not a brokerage, and when they tried to get out of it, the Treasury and the Fed leaned on them not to.

That much is clear. What is not clear is just how badly this is flubbed, how much pressure was put on BoA, and whether any laws were broken.

In any case, the SEC has been investigating this, and about 3 weeks ago, when presented with a settlement, Judge Jed Rakoff balked, saying that the settlement seemed not to make any sense: The fines were too low, and the conditions were too favorable to BoA:

U.S. District Judge Jed Rakoff in Manhattan said today that he wants a fuller explanation of the settlement by Sept. 9. He wants to know why the SEC accepted the bank’s claim that executives who issued a misleading statement relied on lawyers’ advice and why the agency didn’t press the bank to waive its attorney-client privilege to keep communications with counsel confidential.

Relying on lawyers’ advice can be a defense to a securities fraud lawsuit. At a trial, in order to invoke the defense, defendants must waive their attorney-client privilege, the SEC has said.

“This is puzzling,” Rakoff wrote in a four-page order today. “If the responsible officers of the Bank of America, in sworn testimony to the SEC, all stated that ‘they relied entirely on counsel,’ this would seem to be either a flat waiver of privilege or, if privilege is maintained, then entitled to no weight whatsoever, since the statement cannot be tested.”

So what the SEC has been doing is to say that they accept the claim of bad legal advice, but will not demand any proof by actually looking at this legal advice. IANAL, but this is just fracked, so he deferred it, and today, he has out right rejected the settlement.

And now we are starting to see weirdness, specifically the fact that Merrill’s general counsel was summarily fired 4 days after the deal closed. (also here).

We’re talking seriously, “He was immediately escorted from the building without being permitted to return to his office,” fired.

And now, Bank of America is refusing to waive privilege in order to get to the bottom of this, they are demanding to be let off without having any proof, and while the SEC is good with this, Andrew Cuomo is not.

He is now writing letters making it clear that anyone who attempts to suggest that it was bad legal advice, but refuses to supply legal memoranda will be subject to prosecution (also here):

I think that is legal speak for pulling out the hand cuffs, and saying talk now, co%$-suckers.

Bank of America is denying all wrong doing, of course, and the SEC continues to aggressively stonewall both Cuomo and Rakloff.

Maybe I’,m just a paranoid son of a bitch, but I think that there is something very big and very ugly under this rock.