| NEW YORK
NEW YORK A U.S. appeals court on Monday threw
out a jury's finding that Bank of America Corp was
liable for mortgage fraud leading up to the 2008 financial
crisis, voiding a $1.27 billion penalty and dealing the U.S.
Department of Justice a major setback.
The 2nd U.S. Circuit Court of Appeals in New York found
insufficient proof under federal fraud statutes to establish
Bank of America's liability over a mortgage program called
"Hustle" run by the former Countrywide Financial Corp.
The Justice Department claimed Countrywide, which Bank of
America bought in July 2008, defrauded government-sponsored
mortgage financiers Fannie Mae and Freddie Mac
by selling them thousands of toxic loans.
But in a 3-0 decision, U.S. Circuit Judge Richard Wesley
said the evidence at most showed that Countrywide breached
contracts to sell investment-quality loans, and that there was
no proof it intended any deception.
"The trial evidence fails to demonstrate the contemporaneous
fraudulent intent necessary to prove a scheme to defraud through
contractual promises," Wesley wrote.
Bank of America said it was pleased with the ruling. A
spokesman for Manhattan U.S. Attorney Preet Bharara, whose
office pursued the case, had no immediate comment.
The lawsuit was filed in 2012 following a whistleblower's
complaint, and remains one of the biggest government enforcement
cases to go to trial in connection with the U.S. housing
meltdown and financial crisis.
A federal jury had in 2013 found Bank of America and Rebecca
Mairone, a former midlevel Countrywide executive, liable for
fraudulently selling shoddy loans originated through its "High
Speed Swim Lane" program, also called HSSL or "Hustle."
The Justice Department said the program rewarded staff for
generating more mortgages and emphasizing speed over quality,
and resulted in Fannie Mae and Freddie Mac being lied to about
the quality of loans they bought.
Fannie Mae and Freddie Mac were seized by the government in
September 2008 and remain in conservatorships.
Following the verdict, U.S. District Judge Jed Rakoff in
2014 imposed a $1.27 billion penalty on Bank of America and
ordered Mairone to pay $1 million.
Bank of America was sued under the Financial Institutions
Reform, Recovery and Enforcement Act of 1989, a law adopted
after the 1980s savings and loan scandal targeting conduct
"affecting" federally insured financial institutions.
The Justice Department has relied on FIRREA for several
financial crisis-linked cases in part because it provides 10
years from the time of the alleged fraud to bring cases.
Joshua Rosenkranz, a lawyer for Mairone, called the case "a
massive government overreach," and said Monday's decision could
have ramifications for other mortgage-related enforcement
actions against banks.
But he said the decision was also narrow because it did not
address a closely watched issue over whether the government
could sue a bank under FIRREA for conduct "affecting" itself.
No appeals court has addressed that issue, which has emerged
in other cases against banks.
The case is U.S. v. Countrywide Home Loans Inc et at, 2nd
U.S. Circuit Court of Appeals, No. 15-496.