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By Jonathan Stempel
March 31 (Reuters) - A federal judge on Monday recommended letting the U.S. Securities and Exchange Commission pursue a lawsuit against Bank of America Corp over $855 million of mortgage securities that soured during the global financial crisis.
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."
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)