U.S. can pursue case against Bank of America over mortgages

Wed May 8, 2013 3:01pm EDT

Tourists walk past a Bank of America banking center in Times Square in New York June 22, 2012. REUTERS/Brendan McDermid

Tourists walk past a Bank of America banking center in Times Square in New York June 22, 2012.

Credit: Reuters/Brendan McDermid

(Reuters) - A federal judge ruled on Wednesday that the United States can pursue parts of a civil lawsuit against Bank of America Corp (BAC.N) over its sale of toxic mortgages to Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB), boosting a largely untested legal theory the government used in the case.

Bank of America had sought to dismiss the lawsuit, which seeks penalties under two laws. One is the False Claims Act, which is often used to target fraud against the government, and the other is the 1989 FIRREA law.

FIRREA does not yet have much of a track record in court, but the government turned to in the wake of the financial crisis as a potential means to target civil fraud involving financial institutions.

U.S. District Judge Jed Rakoff issued a two-page ruling that dismissed the claims in the lawsuit seeking penalties under the False Claims Act, but allowed the claims that seek penalties under FIRREA to advance. Rakoff, in New York, said he will explain the reasons for his decision at a later date.

The ruling comes as something of a surprise, since Rakoff at a hearing last month appeared skeptical of how the Justice Department had used FIRREA in its case.

The lawsuit, which blames Bank of America for more than $1 billion in losses incurred by the government-controlled mortgage finance companies, accuses the bank of engaging in a scheme to defraud them through a program started at the former Countrywide Financial Corp, which the bank acquired in 2008.

FIRREA, or the Financial Institutions Reform, Recovery, and Enforcement Act, allows the government to seek civil penalties against anyone who commits a fraud "affecting a federally insured financial institution."

But in a trio of cases, banks including Bank of America, Bank of New York Mellon Corp (BK.N) and Wells Fargo & Co (WFC.N) have argued that the law cannot apply when the only financial institution affected by a fraud was the institution that allegedly committed the fraud.

Another federal judge in New York rejected that argument last month in a case against Bank of New York Mellon, and allowed accusations that the bank overcharged clients for trading currencies to move forward.

A Justice Department spokeswoman declined to comment on the Wednesday ruling. A representative for Bank of America did not immediately respond to a request for comment.

(Reporting by Aruna Viswanatha and Jonathan Stempel; Editing by Gerald E. McCormick and Tim Dobbyn)

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Comments (2)
SammyNashy wrote:
So the we bail them out, force them to buy country wide and morgan stanley, then turn around and sue them 50 times. Seems like the lawyers are making out like bandits and all the congress people doing the insider trading and nothing for the actual people who got screwed. stupid!

May 08, 2013 3:31pm EDT  --  Report as abuse
Yet Reuters published an article today that was headlined, “Freddie Mac posts second-biggest profit in its history”.

I’m sure those “toxic mortgages” were extremely detrimental to Freddie’s bottom line which is why they only posted the second largest profit in their history as opposed to “largest ever”.

May 08, 2013 5:03pm EDT  --  Report as abuse
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