NEW YORK, Dec 9 (Reuters) - Baupost Group, the Boston-based hedge fund run by Seth Klarman, told clients Friday that it is "Walnut Place," a group of undisclosed investors who oppose Bank of America Corp's $8.5 billion mortgage bond settlement, according to a person familiar with a memo the fund sent.

Baupost denied in the memo that it had shorted Bank of America stock, the person said, as a blog post alleged.

"From time to time and for a variety of reasons," the memo said, Baupost "forms legal entities to consolidate investments. Walnut Place is such an example," according to the person.

Walnut Place had brought actions against the originator of the loans underlying certain of its residential mortgage backed securities because of "egregious deficiencies in the underwriting of mortgages," the person said, citing the memo.

It said the litigation is intended to protect the interests of its investors, the person said.

A call to Klarman for comment was not returned.

Like most hedge funds, Baupost doesn't usually disclose its earnings or investments, but was reported to have $23 billion in assets last year.

The memo was sent to investors a day after a Reuters story identifying Walnut Place as Baupost. After the story appeared, a blog post claimed Baupost held a short position in Bank of America, or long beneficiaries if litigation is successful against banks who underwrote mortgage-backed securities, such as bond insurer MBIA Inc.

Baupost called the blog's allegations false.

"We currently have no long or short position in equity, corporate debt, or credit default swaps of Bank of America or MBIA," the memo said, according to the person. "We have on occasion owned a small amount of default protection on Bank of America debt as part of our overall portfolio hedging strategy through which we hold credit default swaps on a diverse group of financial institutions and other corporate issuers."

Walnut Place sued Bank of America and Bank of New York Mellon, as trustee, over mortgage-backed securities trusts. The suit accuses Countrywide Home Loans, which Bank of America bought in 2008, of breaching agreements governing the trusts.

At a hearing on that lawsuit in New York state Supreme Court on Thursday, Theodore Mirvis, an attorney who represents Bank of America, said "Walnut Place" was a "made up name," and that Baupost, which he described as a distressed debt or vulture fund, was behind the suit.

"We believe we presented compelling grounds for the dismissal of their case," Lawrence Grayson, a spokesman for Bank of America, said in an interview today. He declined comment on Baupost's disclosure of its identity, pointing to statements made by Mirvis at the hearing and court filings.

Buried in a May filing in the case, Bank of America said that Baupost sent letters to the Bank of New York Mellon, claiming it was a certificate holder and that loans in two trusts did not comply with representations and warranties made by Countrywide Home Loans. It said appraisals were inflated and other information had been misrepresented.

Baupost demanded the trustee give notice of the alleged breaches to Countrywide, according to the document, and require Countrywide to repurchase the loans. On Dec. 21, 2010, the trustee received a letter concerning one of the trusts from entities including the "Walnut Place" entities.

"The Walnut Place entities claimed to have been assigned Baupost's interest in that trust," the document said.

In August, 11 Walnut Place entities also filed to remove the global $8.5 billion settlement case to federal court, citing its size and complexity. Bank of New York Mellon, the trustee for 530 mortgage securitization trusts covered by the proposed agreement had sought approval from a New York state judge. The decision to remove the case to U.S. District Court for the Southern District of New York is on appeal to the U.S. Court of Appeals for the 2nd Circuit.

Klarman, a value investor, is the author of the out-of-print book, "The Margin of Safety."

The case in state court Thursday was Walnut Place LLC v. Countrywide Home Loans Inc, 650497/2011, New York state Supreme Court (Manhattan).

The federal case for the $8.5 billion proposed settlement is Bank of New York Mellon v. Walnut Place LLC, 11-cv-05988, U.S. District Court, Southern District of New York.

(Reporting by Karen Freifeld and Alison Frankel)

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