Last month, New York Attorney General Eric Schneiderman withdrew claims for up to $6 billion in damages against former AIG chief Hank Greenberg. Now, another big case – against Bank of America over its acquisition of Merrill Lynch – looks headed the same way.

The 2010 case, one of the highest profile lawsuits brought by Andrew Cuomo when he was New York attorney general, accuses Bank of America and former top executives Ken Lewis and Joseph Price of misleading shareholders about Merrill Lynch’s losses.

The case appeared to hit trouble on April 5, when a federal judge approved a $2.43 billion settlement in a shareholder class action against Bank of America over the Merrill Lynch deal. Because shareholders have settled, New York can no longer pursue damages on their behalf, according to legal experts.

“Once shareholders have made their peace, they can’t take a second bite at the apple through the attorney general,” said Jacob Zamansky, a New York securities lawyer.

As a result, Schneiderman may either have to withdraw his claims for damages, severely narrowing the case, or face a legal fight involving a landmark 2008 decision by New York’s highest court, the experts said.

The decision may have undercut the Martin Act, the powerful New York state securities statute of 1921 that attorneys general have wielded like a club against Wall Street since it was revived in the early 2000s.

Damien LaVera, a spokesman for Schneiderman, declined to comment on the Bank of America case.

William Jeffress, an attorney who represents Price, said the class action settlement significantly affects the case against his client.

“It limits the remedies that can be sought,” Jeffress, of the law firm Baker Botts, said in an interview. Besides restitution and damages, the state’s lawsuit seeks penalties and other forms of relief.

A spokesman for Bank of America and a lawyer for Lewis both declined to comment on the case.

MASKING FINANCIAL WOES

The same scenario was in play in the Greenberg case, brought in 2005 by then-New York attorney general Eliot Spitzer, who accused him of using sham transactions to mask the company’s financial position.

On April 10, a federal judge approved a $115 million class action settlement between investors and Greenberg, among others, over the same allegations. Just over two weeks later, Schneiderman dropped his claim for damages against Greenberg.

Legal experts said Schneiderman’s move stems from a 2008 ruling in a case known as Spitzer v. Applied Card, which barred the New York attorney general from seeking restitution on behalf of victims who settled a federal class-action, even if they were not made whole.

While the Applied Card ruling involved consumers hit by a credit card fraud scheme, it also affects claims for restitution in securities fraud cases the New York attorney general brings under the Martin Act, such as the Greenberg or Bank of America case.

It creates an incentive for the attorney general’s office to settle cases before investors reach class action settlements over the same claims, effectively putting the attorney general in a race against plaintiffs’ lawyers.

“If you take too long, you’ll essentially be pre-empted by the class action,” said James Park, a professor at Brooklyn Law School and a former assistant attorney general in New York.

While Schneiderman did not give the Applied Card decision as a reason for dropping his damage claims against Greenberg on April 25, his office cited it when it tried, unsuccessfully, to block the class action settlement from gaining approval.

In a brief, David Ellenhorn, an attorney for Schneiderman, said such a settlement would allow Greenberg and his co-defendant, ex-AIG chief financial officer Howard Smith, “to end-run their huge exposure” in the New York lawsuit.

AUDITING LEHMAN

Meanwhile, the New York attorney general’s office may be anticipating a similar scenario in a case against Ernst & Young over its auditing of Lehman Brothers before Lehman collapsed in 2008.

Cuomo brought that headline-grabbing case just before he left office in 2010, accusing the accounting firm of helping Lehman mislead investors about its financial condition.

In a court appearance last December, Schneiderman counsel Ellenhorn sought the ability to go after $150 million in fees that Ernst & Young earned from Lehman Brothers in the years leading up to the bank’s collapse. As part of his argument, Ellenhorn said that an ongoing shareholder class action could hamper his ability to go after damages.

Justice Jeffrey Oing, the New York judge presiding over that case, which has not yet gone to trial, ruled that Schneiderman could not seek the fees since they weren’t paid by investors or the state.

The cases are People v Bank of America Corp., New York State Supreme Court, New York County, No. 450115/2010, People v. Greenberg and Smith, 401720/2005, and People v. Ernst & Young, 451586/2010.

(Reporting by Karen Freifeld; Editing by Eddie Evans and Tim Dobbyn)