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 U.S. Magistrate Judge David Cayer in Charlotte, North Carolina,
where the bank is based, made the recommendation four days after
urging dismissal of a related Department of Justice civil lawsuit,
which alleged violations of a different law.
That ruling had been seen as a possible setback for government
efforts to fight fraud by Wall Street in the sale of mortgage
securities.
"We are reviewing the magistrate judge's recommendation carefully,"
bank spokesman Lawrence Grayson said on Monday, with regard to the
SEC civil case.
Both recommendations are subject to review by U.S. District Judge
Max Cogburn in Charlotte. District judges are not bound by
magistrate judges' recommendations but often follow them.
Authorities accused Bank of America of misleading Wachovia Corp, now
part of Wells Fargo & Co, and the Federal Home Loan Bank of San
Francisco about risks in the $855 million offering, dating from
early 2008 and backed by 1,191 "jumbo" adjustable rate mortgages
that proved less safe than expected.
These loans had been made between July and November 2007, and had
initial principal balances over $417,000, authorities said.
The Justice Department had sued under the Financial Institutions
Reform, Recovery and Enforcement Act of 1989, which it has relied on
in several recent financial crisis cases. Cayer said it failed to
meet a requirement that any alleged false statements were "material"
to a government regulator.
But the SEC sued under the Securities Act of 1933, a law
traditionally used to fight fraud in securities sales. Cayer said
that regulator could pursue claims that Bank of America "negligently
made material misrepresentations and omissions."
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About 70 percent of the loans went through the "wholesale channel,"
or third-party brokers, even though then-Bank of America Chief
Executive Kenneth Lewis had in a July 2007 conference call referred
to such loans as "toxic waste."
But Cayer said Bank of America hid the risks by "directing"
investors in disclosures to supposedly comparable offerings where
just 42 percent of loans went in the wholesale channel.
"These allegations are sufficient to withstand dismissal," Cayer
wrote.
SEC spokesman John Nester declined to comment.
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.
The case is SEC v. Bank of America Corp et al, U.S. District Court,
Western District of North Carolina, No. 13-00447.
(Reporting by Jonathan Stempel in New York;
editing by Lisa Shumaker
and Richard Chang)
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