Bank of America Corp and the top U.S. securities regulator sought to persuade a judge to approve their $33 million settlement of a civil lawsuit over the lack of disclosure of billions of dollars of bonuses at Merrill Lynch & Co.

A settlement would address part of what has become one of the hottest controversies of the global credit crisis.

In a filing on Monday, Bank of America told Judge Jed Rakoff of Manhattan federal court that it did not mislead shareholders about its approval of up to $5.8 billion of bonuses, saying it was widely understood that Merrill would pay out billions.

Meanwhile, the U.S. Securities and Exchange Commission said that the largest U.S. bank was wrong not to tell shareholders about the payouts, but that a settlement strikes a fair balance between deterrence and not punishing shareholders further.

Reasonable people can debate whether the penalty should be higher or lower, but it is squarely within an acceptable range, the SEC said.

Rakoff rejected the settlement on Aug 10, demanding many more details about who knew what and when about the bonuses, including the decision not to reveal what would become $3.6 billion of bonus awards. The merger closed on Jan 1.

This isn't about money anymore, this is about the truth, said Tony Plath, an associate finance professor at the University of North Carolina at Charlotte. If the bank really believed it could defend itself and win, why cut a $33 million check to make it go away? This isn't a parking ticket.

CEOS INTERVIEWED

In its filing, the SEC said it interviewed 11 top Bank of America and Merrill executives about the merger, including the respective chief executives, Kenneth Lewis and John Thain.

It said Lewis, Thain, and the respective executives who led the merger talks, Bank of America's Gregory Curl and Merrill's Gregory Fleming, all said the preparation of the public proxy statement, including a decision not to attach a schedule discussing bonuses, was made by lawyers on both sides.

Even so, Bank of America maintained in its filing that it was clear from Merrill's public disclosures and media reports that Merrill would award billions of dollars of bonuses, despite a full-year loss that would reach $27.6 billion.

That loss would prompt Charlotte, North Carolina-based Bank of America to accept an additional $20 billion of federal bailout money, for a total of $45 billion taken from the Troubled Asset Relief Program.

The bonuses have been the focus of Congressional hearings and a probe by New York Attorney General Andrew Cuomo.

Fallout from them have added to pressure on Lewis, a four-decade veteran of Bank of America who has since April lost his job as chairman and more than half of his long-supportive board of directors.

Bank of America's shares are down 49 percent since the merger was announced last Sept 15, at the height of the global banking crisis. TOTAL MIX

In its Monday filing, Bank of America said Merrill regularly disclosed its intention to pay bonuses, and that these amounts would be similar to 2007 levels.

It also said a proxy filing gave shareholders notice of a negative covenant in the merger agreement that any bonus restrictions would be subject to exceptions.

The intention of Merrill Lynch & Co Inc to pay incentive compensation for 2008 was disclosed and was part of the 'total mix' of information available to shareholders, the bank said.

Bank of America spokesman Larry Di Rita declined to elaborate on Monday's filing. The bank was not immediately available for comment on the government filing. A spokesman for Thain had no immediate comment.

At a hearing on August 10, Rakoff said the $33 million settlement seemed to be lacking in transparency and strangely askew, and might not prove remotely reasonable if the SEC were right that the bank lied about the bonuses.

Rakoff said he could not reconcile the SEC's position that Bank of America effectively lied to shareholders with its decision not to force the bank to admit wrongdoing.

He also questioned one might view the government aid as a source of funding for the bonuses, but the SEC rejected that argument.

In 2003, Rakoff forced a revision of a similar SEC settlement with WorldCom Inc over an accounting fraud, increasing the payout to $750 million from $500 million.

Bank of America shares closed down 11 cents at $17.35 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; Additional reporting by Elinor Comlay and Joe Rauch; Editing Bernard Orr)