The regulatory cloud has lifted for Kenneth D. Lewis. Last week, the former head of Bank of America (NYSE:BAC) received a modest penalty, paid for by his former employer, and a temporary ban from an industry he is no longer a part of.

In this seminal financial crisis investigation, regulators put on a master class in how to take a strong case and render it weak.

It's worth recounting the story from its beginning.

Bank of America, based in Charlotte, N.C., was an unwieldy agglomeration of dozens of banks tacked together with spit and Excel spreadsheets. As the world economy imploded in the middle of September 2008, the bank rushed into yet another acquisition, taking over Merrill Lynch. Merrill was failing, facing the same short-term funding run that would have collapsed all the investment banks had it not been for the government's intervention.

In what now reads as unintended comedy, Mr. Lewis called it the "strategic opportunity of a lifetime." Oh, and he said there had been "absolutely no pressure" from the Federal Reserve to take Merrill over. He would later admit this was untrue.

Worst Deal in History

We now know, of course, that Bank of America's acquisition of Merrill was one of the worst deals in corporate history. As the two banks moved to consummate the merger in the fourth quarter of 2008, Merrill bled billions while paying huge bonuses to its executives. Bank of America ended up needing two bailouts from the Treasury Department, as well as extraordinary lending from the Federal Reserve.

On Feb. 4, 2010, Andrew M. Cuomo, then New York State's attorney general, accused Bank of America of misleading its shareholders and the public about the losses and the bonuses by failing to disclose them before shareholders voted on the merger on Dec. 5, 2008.

According to the complaint, Bank of America executives wrestled over whether to tell investors about the mounting Merrill losses. On Nov. 13, 2008, Bank of America's general counsel, Timothy J. Mayopoulos, and the bank's outside lawyers from Wachtell, Lipton, Rosen & Katz decided that the numbers would have to be disclosed in a U.S. Securities and Exchange Commission filing, according to the complaint. Then, they consulted with Joe Price, the bank's chief financial officer, and decided to reverse their decision.

On Dec. 4, the complaint alleges, Mr. Price knew that the losses had breached the threshold that Mr. Mayopoulos had laid out as the benchmark for requiring disclosure. The shareholder vote went ahead without any filing.

On Dec. 9, according to Mr. Cuomo's complaint, Mr. Mayopoulos listened while Mr. Price told the board that Merrill was going to lose $9 billion in the fourth quarter. This was not accurate. In truth, Merrill had already lost $9 billion and expected to lose billions more before the quarter was over. After the board meeting, Mr. Mayopoulos tried to discuss the losses with Mr. Price, who was unavailable.

General Counsel Fired

The next morning, Mr. Mayopoulos was fired and frog-marched out of the building, according to people briefed on the matter.

Bank of America installed Brian T. Moynihan as general counsel of one of the nation's largest banks. Mr. Moynihan hadn't practiced law in 15 years. His legal career was such an afterthought that he had let his bar membership lapse. He would go on to become the chief executive of the bank.

Mr. Mayopoulos wasn't alone in his concerns. Merrill's auditors, Deloitte & Touche, told Bank of America that it "might want to consider" informing shareholders of the losses, according to the complaint. Bank of America's corporate treasurer, urging the bank to disclose, said in a conversation with Mr. Price that he did not want to be talking about Merrill's losses "through a glass wall over a telephone."

Merrill's fourth-quarter loss would eventually be more than $15.8 billion, and Merrill paid more than $3.6 billion in bonuses.

It is a crime to knowingly deceive shareholders about the financial condition of your company. Top officers of Bank of America knew about giant, surprising Merrill losses but did not disclose them promptly or precisely to the board or shareholders. They took steps to cut out people who advocated disclosing the information. That sure seems like a lot of smoke.

At least one regulator thought it merited a criminal investigation. The Office of the Special Inspector General for the Troubled Asset Relief Program referred the case for criminal investigation to the United States attorney's office in Manhattan.

Raymond J. Lohier, who was the chief of the securities and commodities fraud task force at the office, took charge of the investigation. But he seemed to view it with skepticism, according to a person close to the investigation. The Federal Reserve, both a regulator and one of the potential victims because it was lending to Bank of America, contended that it did not consider the losses material. The investigation didn't go anywhere.

Pushed for Bailout Money

Mr. Lohier, the Fed and the United States attorney's office declined to comment.

White-collar criminal cases are always difficult, and this one would have been especially hard. One big problem: Mr. Mayopoulos, the general counsel who was summarily fired, never flipped against his former bosses.

Moreover, the government's role in the transaction may have been ultimately absolving. Though his bank hadn't disclosed the Merrill losses publicly, Mr. Lewis used them as a cudgel to push for a second round of bailout money from the Treasury. Through the course of the various investigations, Bank of America executives cited the government's involvement in defending their actions.

The Justice Department, of course, isn't the only securities law enforcer out there. The SEC brought its own case. Internally, however, the SEC felt that New York State complaint overreached, unconvinced, for instance, that Mr. Mayopoulos was fired over the issue of whether to disclose the losses. The agency eventually settled with the bank in August 2009 for a paltry $33 million.

Judge Jed S. Rakoff of the United States District Court in Manhattan found that amount ludicrously low. Several months later, the agency bumped it up to $150 million and Judge Rakoff reluctantly signed off, writing with obvious fury that this was "half-baked justice at best."

Lewis Barred From Public Companies

The New York case was settled last week. Mr. Lewis agreed to pay $10 million, which was provided by Bank of America, which also reached a settlement with the state for $15 million. He did not admit or deny any of the charges. He is barred from being an executive or director of a public company. I don't consider that entirely toothless; it damages his standing in society. But it's not exactly severe.

On Friday, Mr. Schneiderman's office intends to seek to permanently bar Mr. Price, who did not settle, from serving as a director, officer or in any capacity in the securities industry, according to a person close to the investigation. If it happens, it would be a serious accomplishment.

Mr. Price's lawyer did not respond to a request for comment.

The New York State attorney general, Eric T. Schneiderman, moved so slowly that a class-action lawsuit, relying on the facts laid out in the original complaint, settled for $2.4 billion in September 2012. A quirky New York legal decision precluded the state from getting greater restitution for taxpayers because the class-action suit had already been settled. With that opportunity blown, the attorney general went for a fine from Mr. Lewis.

Where They Are Now

Here's a "Where Are They Now?" roster. Mr. Lohier was appointed by President Obama to be a judge on the United States Court of Appeals for the Second Circuit. Mr. Mayopoulos became the chief executive of Fannie Mae. Mr. Cuomo became governor of New York.

Then there is Mr. Lewis's high-priced lawyer. The lawyer issued a scathing assessment of the case initially. Mr. Cuomo's decision to sue was "a badly misguided decision without support in the facts or the law," this lawyer said. There is "not a shred of objective evidence" to support the case.

Who was this zealous advocate? One Mary Jo White. You may recall her from such roles as the current chairwoman of the SEC.

And the public? We got as much justice as we have come to expect.

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