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Judge Says U.S. Fraud Case vs. Bank of America Should Be Tossed

Judge Says U.S. Fraud Case vs. Bank of America Should Be Tossed

March 29, 2014

A federal judge has recommended the dismissal of a U.S. government lawsuit accusing Bank of America Corp of defrauding investors into buying about $855 million of mortgage securities that soured during the global financial crisis.

If it stands, Thursday’s ruling by U.S. Magistrate Judge David Cayer in Charlotte, North Carolina could mark a serious setback for the U.S. Department of Justice in its effort to fight fraud in the sale of mortgage securities.

Cayer said the government fell short of demonstrating that any false statements the bank may have made were material, or that the governing law covered the securities sales.

Less than two hours later, the Justice Department filed court papers saying it plans to object to Cayer’s findings.

The lawsuit, which sought civil penalties, was a product of President Obama’s Residential Mortgage-Backed Securities Working Group, which includes the Justice Department and other federal and state regulators.

It is one of several in which the government has relied on a law adopted after the 1980s savings and loan scandals, the Financial Institutions Reform, Recovery and Enforcement Act, to punish alleged misconduct causing the financial crisis.

That law has a 10-year statute of limitations, double the usual length in securities fraud cases, which the government took advantage of when it sued Bank of America last August over alleged misconduct dating from early 2008.

Bank of America was accused of misleading Wachovia Corp, now owned by Wells Fargo & Co, and the Federal Home Loan Bank of San Francisco about risks in the $855 million offering, from which they bought about 98 percent of the securities.

While the securities were backed by 1,191 seemingly safe “jumbo” adjustable-rate mortgages, the government said more than 40 percent of these home loans did not comply with Bank of America’s underwriting standards.


The government claimed civil penalties under FIRREA based on the bank’s alleged violations of laws to fight fraud in “loan and credit applications” and prohibit various false statements.

Cayer, however, said the first law has been applied “consistently” to “traditional customer related bank activities such as loans,” and thus did not cover securities purchases.

He also said the government failed to show as required that any false statements were “material” to the Federal Housing Finance Board, which regulated the FHLB-San Francisco, or that either of those entities ever complained.

Bank of America spokesman Lawrence Grayson said the Charlotte-based bank is pleased with the recommendation.

The bank had accused the Justice Department of stretching FIRREA beyond recognition to create “an unprecedented, new regime for regulating securities – in addition to and inevitably inconsistent with the federal securities laws.”

U.S. District Judge Max Cogburn will now review Cayer’s recommendation. While magistrate judges’ recommendations do not bind district judges, they are often followed.

Cayer’s recommendation does not affect a related lawsuit brought by the U.S. Securities and Exchange Commission.

On Wednesday, Bank of America agreed to pay $6.3 billion in cash to resolve lawsuits over the sale of defective mortgage securities to Fannie Mae and Freddie Mac.

Since 2010, Bank of America has agreed to pay well over $50 billion to settle legal and other claims stemming from the nation’s housing and financial crises.

Much of that sum, including part of Wednesday’s settlement, is linked to Countrywide Financial Corp and Merrill Lynch & Co, both of which Bank of America bought. The North Carolina cases relate to the bank’s own alleged misconduct.

The case is U.S. v. Bank of America Corp et al, U.S. District Court, Western District of North Carolina, No. 13-00446.

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