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 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.
STRETCHING FIRREA
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.
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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.
(Reporting by Karen Freifeld and Jonathan Stempel in New York;
additional reporting by Aruna Viswanatha in Washington, D.C.;
editing by Andre Grenon, Andrew Hay and Cynthia Osterman)
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