* Federal judge rules US can use civil fraud law against BofA * US targeted B of A for more than $1 bln in losses to Fannie, Freddie By Aruna Viswanatha May 8 The United States can pursue parts of a civil lawsuit against Bank of America Corp over its sale of toxic mortgages to Fannie Mae and Freddie Mac , boosting a largely untested legal theory the government used in the case, a federal judge ruled on Wednesday. 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, 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." FIRREA does not yet have much of a track record in court, but the government turned to it 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 targets Bank of America for more than $1 billion in losses incurred by Fannie Mae and Freddie Mac, 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. Much of the legal dispute over the interpretation of the FIRREA law is about exactly how to understand the phrase "affecting a federally insured financial institution" The Justice Department has used that phrase to cover the financial institutions that also allegedly committed the fraud in a trio of cases against Bank of America, Bank of New York Mellon Corp and Wells Fargo & Co. All three have argued that such a reading turns the law on its head. But another federal judge in New York rejected that reasoning last month in the case against Bank of New York Mellon, and allowed accusations that the bank overcharged clients for trading currencies to move forward. In its lawsuit against Bank of America, the government said the alleged fraud also affected several federally insured community banks, which held concentrated investments in preferred stock in Fannie and Freddie. The value of that stock plummeted in value when the two firms became insolvent and were placed into conservatorship in 2008. Bank of America spokesman Lawrence Grayson said the bank was pleased that the case was reduced. Rakoff's ruling eliminated claims under the False Claims Act, a Civil War-era law that allows the government to receive up to triple its damages. "We continue to believe that neither Bank of America nor Countrywide defrauded Fannie Mae or Freddie Mac, and we will address the remaining allegations as this matter proceeds," Grayson said. Ellen Davis, spokeswoman for the U.S. Attorney's office in Manhattan, which brought the case, declined comment on the ruling. The ruling also allows the government's case against former chief operating officer for a Countrywide lending division, Rebecca Mairone to move forward. "We are still reviewing the court's ruling, and we still maintain that Rebecca has always acted with the utmost honesty and integrity," said Marc Mukasey, a lawyer for Mairone. The case is U.S. ex rel. O'Donnell v. Bank of America Corp et al, U.S. District Court, Southern District of New York, No. 12-01422.