Bank of America Corp will pay $137 million to settle allegations by federal and state authorities that it defrauded buyers of municipal bond derivatives.

On Tuesday, the U.S. Department of Justice said the bank would pay restitution to federal and state agencies as part of its admission of bid-rigging and other anti-competitive practices in selling municipal bond derivatives to various state agencies, municipalities, school districts and nonprofits.

The settlement is the latest in a far-reaching, industry-wide probe that dates to 2007 of the municipal bond derivatives market.

The largest U.S. bank was granted amnesty from any civil penalties that resulted from the investigation because the bank initially reported the violations to regulators, and cooperated with the investigation.

Bank of America is pleased to put this matter behind it, and has already voluntarily undertaken numerous remediation efforts, a Bank of America spokesman said in a prepared statement. The company continues to cooperate with other on-going investigations into the muni derivatives market, the spokesman said.

Bank of America will pay $36 million in disgorgement and interest to the U.S. Securities and Exchange Commission, while $101 million will be distributed among other agencies.

The Internal Revenue service will receive $25 million, while the 20 state attorneys general involved in the investigation will distribute $62.5 million to investors affected by the bank's practices.

The bank will also pay $4.5 million to cover the attorneys' general investigation into the matter.

Bidding agents, the SEC said in a statement, provided Banc of America Securities information on competing bids for securities, provided straw man bids that enabled the bank to win transactions unfairly, or steered municipalities' business to the bank.

Those bidding agents were then rewarded with gratuitous payments and other kickbacks and Banc of America Securities' management condoned the practices, the SEC alleged,.

As part of the settlement, the SEC also announced that Douglas Lee Campbell is barred from associating with any broker, deal or investment adviser.

Campbell, a former Banc of America Securities employee, pleaded guilty on September 9, 2010 to two counts of conspiracy and one count of wire fraud for his part in the bid rigging process. Campbell was also not subject to civil money penalties because of his cooperation with the investigation.

(Reporting by Joe Rauch; Editing by Derek Caney, Dave Zimmerman)

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