(Adds bank defenses and mortgage losses, Obama working group)
By Karen Freifeld and Jonathan Stempel
March 27 A federal judge has recommended
dismissal of a U.S. government lawsuit accusing Bank of America
Corp of defrauding investors into buying about $855
million of mortgage securities that soured during the global
If it stands, Thursday's ruling by U.S. Magistrate Judge
David Cayer in Charlotte, North Carolina could mark a serious
setback for the U.S. Department of Justice in its effort to
fight fraud in the sale of mortgage securities.
Cayer said the government fell short of demonstrating that
any false statements the bank may have made were material, or
that the governing law covered the securities sales.
Less than two hours later, the Justice Department filed
court papers saying it plans to object to Cayer's findings.
The lawsuit, which sought civil penalties, was a product of
President Obama's Residential Mortgage-Backed Securities Working
Group, which includes the Justice Department and other federal
and state regulators.
It is one of several in which the government has relied on a
law adopted after the 1980s savings and loan scandals, the
Financial Institutions Reform, Recovery and Enforcement Act, to
punish alleged misconduct causing the financial crisis.
That law has a 10-year statute of limitations, double the
usual length in securities fraud cases, which the government
took advantage of when it sued Bank of America last August over
alleged misconduct dating from early 2008.
Bank of America was accused of misleading Wachovia Corp, now
owned by Wells Fargo & Co, and the Federal Home Loan
Bank of San Francisco about risks in the $855 million offering,
from which they bought about 98 percent of the securities.
While the securities were backed by 1,191 seemingly safe
"jumbo" adjustable-rate mortgages, the government said more than
40 percent of these home loans did not comply with Bank of
America's underwriting standards.
The government claimed civil penalties under FIRREA based on
the bank's alleged violations of laws to fight fraud in "loan
and credit applications" and prohibit various false statements.
Cayer, however, said the first law has been applied
"consistently" to "traditional customer related bank activities
such as loans," and thus did not cover securities purchases.
He also said the government failed to show as required that
any false statements were "material" to the Federal Housing
Finance Board, which regulated the FHLB-San Francisco, or that
either of those entities ever complained.
Bank of America spokesman Lawrence Grayson said the
Charlotte-based bank is pleased with the recommendation.
The bank had accused the Justice Department of stretching
FIRREA beyond recognition to create "an unprecedented, new
regime for regulating securities - in addition to and inevitably
inconsistent with the federal securities laws."
U.S. District Judge Max Cogburn will now review Cayer's
recommendation. While magistrate judges' recommendations do not
bind district judges, they are often followed.
Cayer's recommendation does not affect a related lawsuit
brought by the U.S. Securities and Exchange Commission.
On Wednesday, Bank of America agreed to pay $6.3 billion in
cash to resolve lawsuits over the sale of defective mortgage
securities to Fannie Mae and Freddie Mac.
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.
Much of that sum, including part of Wednesday's settlement,
is linked to Countrywide Financial Corp and Merrill Lynch & Co,
both of which Bank of America bought. The North Carolina cases
relate to the bank's own alleged misconduct.
The case is U.S. v. Bank of America Corp et al, U.S.
District Court, Western District of North Carolina, No.
(Reporting by Karen Freifeld and Jonathan Stempel in New York;
Additional reporting by Aruna Viswanatha in Washington, D.C.;
Editing by Andre Grenon, Andrew Hay and Cynthia Osterman)