Bank of America should win dismissal of a Justice Department lawsuit accusing it of misleading investors about the quality of loans tied to $850 million in mortgage-backed securities, a judge said.

The government's allegation that the bank made false statements wasn't properly supported, U.S. Magistrate Judge David Cayer in Charlotte, North Carolina, said yesterday in a recommendation to dismiss the case. The U.S., which filed a notice that it will object, will have a chance to challenge the recommendation before a district court judge and appeal any dismissal.

The proposal is a setback for the U.S. as it seeks to punish companies for wrongdoing that helped trigger the financial crisis. The case and others like it allege violations of a law that's a relic of the savings-and-loan crisis of the 1980s, allowing civil suits to reach back further in time to target bad behavior and seek larger damages in court.

If the case is dismissed, it will be a first for about a dozen companies that have been targeted under the Financial Institution Reform, Recovery and Enforcement Act of 1989, known as FIRREA, which allows the government to sue an individual or group, rather than charge them with a crime, for fraud that affects a federally insured financial institution.

While rarely used, FIRREA has its benefits: it demands a lower burden of proof than needed for a criminal case and poses the prospect of hefty penalties of more than $1 million for each fraudulent statement or act. The law also gives prosecutors 10 years to file a case rather than a five-year deadline required under some criminal and civil statutes.

Lawyers for several banks defending such suits have fought to have the actions dismissed, to no avail. In a New York case, Bank of America was found liable by a federal jury last year after it was ordered to go to trial over claims that its Countrywide unit defrauded Fannie Mae and Freddie Mac by selling them billions of dollars in bad mortgages. U.S. District Judge Jed Rakoff is now deciding how much of a penalty to impose.

Bank of New York Mellon faces a FIRREA case brought by Manhattan U.S. Attorney Preet Bharara's office alleging that the bank's foreign exchange operations disadvantaged its own customers, giving them poor pricing execution and allowing the bank to pocket the profits.

In the Bank of America case in North Carolina, the Justice Department said the lender had portrayed bonds as being backed by prime loans vetted by its staff, even though most were riskier wholesale mortgages, meaning they were originated by outside brokers. Some were "PaperSaver" loans that didn't require proof of borrowers' income, the U.S. said.

Bank of America, the second-largest bank in the U.S., asked the court in November to dismiss the case, arguing the government failed to make adequate claims.

In his nine-page ruling, Cayer rejected the government's attempt to justify the case by claiming the bank lied to the Federal Housing Finance Board, which is regulated by the federal government.

"The complaint contains no factual allegations that the defendants' statements occurred within the jurisdiction of the FHFB or affected its decisions," Cayer said.

Lawrence Grayson, a spokesman for the Charlotte-based bank, said the company is pleased with Cayer's recommendation that the case be dismissed.

The bank this week said it agreed to a $9.5 billion settlement over claims tied to faulty mortgages and boosted its dividend for the first time since 2007 in its latest steps to put the financial crisis behind it.

The case is U.S. v. Bank of America Corp., 13-cv-00446, U.S. District Court, Western District of North Carolina (Charlotte).

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