A federal judge on Monday rejected Bank of America Corp's and the U.S. Securities and Exchange Commission's proposed settlement over Merrill Lynch & Co bonuses, describing the agreement as a contrivance that harms shareholders.

U.S. District Judge Jed Rakoff's decision comes as the largest U.S. bank faces a Monday deadline to provide more details about the merger to New York Attorney General Andrew Cuomo, or else its executives could face possible fraud charges.

Bank of America had agreed last month to pay $33 million to settle SEC charges it misled investors about its authorizing the payment of $3.6 billion of bonuses to Merrill employees, even though that company lost $27.6 billion last year.

But Rakoff said the settlement does not comport with the most elementary notions of justice and morality because it subjects shareholders to a monetary penalty for the bank's alleged misconduct.

The parties' arguments leave the distinct impression that the proposed consent judgment was a contrivance designed to provide the SEC with the facade of enforcement and the management of the bank with a quick resolution of an embarrassing inquiry -- all at the expense of the sole alleged victims, the shareholders, Rakoff said.

Rakoff directed the parties to prepare for a possible trial that would begin no later than February 1, 2010.

Bank of America, the SEC and Cuomo's office were not immediately available for comment.

The bank's shares were down 29 cents, or 1.7 percent, at $16.68 in afternoon trading on the New York Stock Exchange.

The case is SEC v. Bank of America Corp, U.S. District Court, Southern District of New York (Manhattan), No. 09-6829.

(Reporting by Jonathan Stempel, editing by Leslie Gevirtz)