(Adds details from decision, case citation, byline)
By Jonathan Stempel
March 31 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
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
"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
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,"
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)