The Federal Deposit Insurance Corp. urged a U.S. judge to reject a proposed $500 million class-action settlement between Bank of America Corp.'s Countrywide unit and investors in devalued mortgage-backed securities.

The FDIC, as receiver for 19 failed banks that owned the Countrywide securities, said in a filing yesterday in federal court in Los Angeles that the proposed settlement sets aside only $41 million for the claims of 91 percent of the investors in the securities while the lawyers for the lead plaintiffs will receive $85 million.

The lead plaintiffs and their lawyers can only represent a "tiny minority" of the investors because of a series of rulings by U.S. District Judge Mariana Pfaelzer in 2011 in the federal securities class-action. The judge said only the claims for securities that were purchased by investors who filed the very first lawsuits could proceed under federal securities law.

"The court's ruling on standing disarmed the named plaintiffs," the FDIC said. "They could no longer use the threat of litigation to press for a better offer, and they then ceased to be able to fairly and adequately protect the interests of the class."

The FDIC also said the $500 million amount is too small because it represents only about 0.11 percent of the $450.7 billion face value of the securities it covers. Previous class- action settlements of residential mortgage-backed securities cases have averaged 1.1 percent of the face value of the securities, according to the FDIC.

Pfaelzer in August gave preliminary approval to the settlement. A hearing on final approval is scheduled for Oct. 28.
The settlement resolves three class-action lawsuits brought by investors in Countrywide Financial Corp. residential mortgage-backed securities who claimed the mortgage lender lied in the offering documents for the securities.

The settlement sets aside $267 million, after the lawyers' share, for claims by investors in a group of 58 sections of securities that had been originally purchased by the plaintiffs in the initial lawsuits filed as early as 2007 in California state court.

The settlement leaves $111 million for investors in sections of the securities for which class-action claims were filed too late. The remainder of the settlement goes to investors in parts of the securities for which no plaintiff sought to represent other investors in a class-action case.

The entire settlement covers about 430 offerings of Countrywide mortgage-backed securities that were sold in about 9,200 segments divided by credit risk and rate of return for the underlying residential mortgages.

The state court cases, filed on behalf of investors in all 9,200 segments, were removed to federal court last year and Pfaelzer hasn't yet applied the same ruling on standing as she had in the federal class-action case. That created a "procedural interlude" for the named plaintiffs in those cases to settle on behalf of all investors, according to the FDIC.

"If named plaintiffs and class counsel had been objective, they would have realized that this court's rulings on the scope of standing in RMBS class actions are vulnerable on appeal and worth untold times more than the $41 million that the proposed settlement would award to absent class members whose claims would be revived if those rulings were reversed," the FDIC said.

The FDIC and other investors in Countrywide mortgage-backed securities have filed separate lawsuits both under federal and state law following Pfaelzer's rulings in 2011 on the standing issue. Pfaelzer in July instructed the lawyers who reached a settlement to make sure that attorneys for investors in those cases knew that the settlement could wipe out their claims.

Spencer Burkholz, a lawyer for the named plaintiffs in the original state court lawsuits, said at an Aug. 1 hearing before Pfaelzer that the appellate rights for the dismissed claims were "speculative" and that investors who were unhappy with the settlement could opt out.

Burkholz didn't immediately return a call for comment on the FDIC's objections.

The class-action settlement is separate from the $8.5 billion accord between Bank of America and 22 institutional investors in Countrywide mortgage-backed securities filed in New York. That settlement, which is still pending, would resolve claims that Countrywide is contractually obliged to compensate investors for underlying mortgages that went into default.

The settlement before Pfaelzer resolves claims by the original purchasers of the Countrywide securities, whereas the settlement in New York resolves claims by current holders of them, Burkholz said at the Aug. 1 hearing.

Bank of America, the second-largest U.S. bank by assets, acquired Countrywide in 2008.

Lawrence Grayson, a spokesman for Charlotte, North Carolina-based Bank of America, declined to comment on the FDIC's filing.

Michele Heller, an FDIC spokeswoman, declined to comment.

The case is Maine State Retirement System v. Countrywide Financial Corp., 10-cv-00302, U.S. District Court, Central District of California (Los Angeles).

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