Bank of America Corp. failed to win dismissal of two government lawsuits in which it's accused of misleading investors about the quality of loans tied to $850 million in residential mortgage-backed securities.
U.S. District Judge Max O. Cogburn Jr. in Charlotte, North Carolina, ruled yesterday that the U.S. Securities and Exchange Commission properly laid out claims that Bank of America lied to investors about the projected health of the mortgages.
Cogburn also gave the U.S. Justice Department 30 days to revise a parallel suit over the same securities after finding the government hadn't properly stated its case that bank documents omitted key facts and included false statements. The bank argued that the suit should be dismissed.
"The court need not reach far outside the complaint or be an expert in economics to take notice that it was the trading of toxic RMBS between financial institutions that nearly brought down the banking system in 2008," Cogburn said in his ruling in the Justice Department suit.
Lawrence Grayson, a spokesman for the Charlotte-based bank, declined to comment on the litigation.
The cases are part of a U.S. effort to punish companies for actions it says helped trigger the financial crisis. Bank of America alone has spent more than $50 billion to resolve claims related to shoddy mortgages, most tied to its 2008 purchase of Countrywide Financial Corp., once the biggest U.S. mortgage lender.
The SEC claims the lender's actions amounted to securities fraud, while the Justice Department alleges a violation of a rarely used law dating to the savings-and-loan crisis of the 1980s. The statute allows the government to punish misdeeds too old to be covered by other laws. It also lets the U.S. seek larger damage awards.
The government agencies are suing at the same time because the alleged violations broke different sets of rules, according to the complaints. It's common for the SEC and Justice Department to file parallel cases in criminal matters. Both of the Bank of America cases are civil.
A magistrate judge in March gave an advisory opinion that the SEC case go forward, a recommendation Cogburn decided to adopt. In an early victory for the bank, the same magistrate said the DOJ's case should be dismissed without giving the agency a chance to amend it. Cogburn disagreed.
About 98 percent of the securities in the two cases were bought by Wachovia Corp. and the Federal Home Loan Bank of San Francisco, neither of which is involved in the lawsuits.
Bank of America didn't tell investors in its preliminary documentation that most of the mortgages were acquired through wholesale markets that executives were deriding at the time, according to the complaints. The bank is also accused of failing to file the flawed documents with the SEC.
The bank argued that the buyers were sophisticated financial institutions. They bought the securities around 2007 and 2008, a few months before the U.S. real estate market collapsed. The institutions never sued, the bank said.
The U.S. seeks to "fundamentally rewrite the securities laws by criminalizing immaterial misstatements," the bank said in court papers. "With the benefit of hindsight, the government alleges that the bank should have provided these investors with more information about the risk of their investment."
If the Justice Department case had been dismissed, it would have been a first among about a dozen companies targeted under the Financial Institution Reform, Recovery and Enforcement Act of 1989, or FIRREA, which lets the government sue people or groups rather than charge them with crimes, for fraud that affects a federally insured financial institution.
The law has advantages for the government. It imposes a lower burden of proof than a criminal prosecution and threatens penalties of more than $1 million for each fraudulent statement or act. FIRREA also gives prosecutors 10 years to file, rather than the five years under some criminal and civil statutes. Banks fighting to get FIRREA cases dismissed have yet to succeed.
In a New York case, Bank of America was found liable by a federal jury last year after a trial over claims that the Countrywide unit defrauded Fannie Mae (FNMA) and Freddie Mac (FMCC) by selling them billions of dollars in bad mortgages.
U.S. District Judge Jed Rakoff is now weighing a penalty, with prosecutors seeking the maximum of $863 million.
In the North Carolina case, the Justice Department said the lender portrayed its bonds as being backed by prime loans vetted by its staff, even though most were riskier wholesale mortgages originated by outside brokers. Some were "PaperSaver" loans that didn't require proof of borrowers' income, the U.S. said.
The Justice Department case is U.S. v. Bank of America Corp. (BAC), 13-cv-00446, and the SEC case is Securities and Exchange Commission v. Bank of America NA, 3:13-cv-00447, U.S. District Court, Western District of North Carolina (Charlotte).