BNY Mellon Broke New York Law, Misled Investors on Mortgages, State Claims

Bank of New York Mellon Corp. (BK) violated state law in its role representing investors in mortgage securities created by Bank of America Corp. (BAC)’s Countrywide Financial unit, the New York Attorney General said.

BNY Mellon should pay penalties and restitution to investors, Attorney General Eric Schneiderman said yesterday in a court filing involving Bank of America’s proposed $8.5 billion mortgage-bond settlement. Schneiderman, who said he has “potential claims” against Bank of America, called the settlement unfair to investors and asked a judge to reject it.

“The proposed cash payment is far less than the massive losses investors have faced and will continue to face,” Schneiderman said in the filing in state court in Manhattan.

Under the proposed deal, which requires court approval, Bank of America would pay $8.5 billion to resolve claims from investors who wanted the Charlotte, North Carolina-based bank to buy back loans that were packaged into bonds. The agreement was reached with 22 institutional investors and BNY Mellon, which acts as the trustee for the mortgage-securitization trusts. The deal would apply to other investors in the trusts.

BNY Mellon’s conduct as trustee violated the state’s Martin Act by misleading investors, Schneiderman said in court papers filed yesterday. The bank engaged in “repeated fraud and illegality,” Schneiderman said. New York’s Martin Act allows the attorney general to file civil lawsuits and criminal charges in securities-fraud cases.

Photographer: Jonathan Fickies/Bloomberg

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Photographer: Jonathan Fickies/Bloomberg

Bank of New York Mellon Corp. violated New York state law by misleading investors, state attorney general’s office said.

‘Heightened Duty’

Delaware Attorney General Beau Biden also intends to intervene in the Bank of America case, Ian McConnel, a deputy attorney general at the office, said at a court hearing today about the agreement. Delaware public pension funds may be investors in the Countrywide bonds and some of the trusts in the settlement were established under Delaware law, McConnel said in an interview after the hearing.

Schneiderman claims New York-based BNY Mellon was aware of “loan documentation deficiencies,” such as Countrywide’s improper assignments and transfers of notes needed for foreclosures. That knowledge triggered a “heightened duty” to bondholders, he said.

Countrywide’s failure to transfer complete mortgage loan documentation to the trusts hampered the ability of the trusts to foreclose on delinquent mortgages, impairing the value of the securities backed by the mortgages, Schneiderman said.

“These circumstances apparently triggered widespread fraud,” Schneiderman said, including Bank of America’s “fabrication of missing documentation.”

BNY Mellon spokesman Ron Gruendl, said in an e-mail that the bank “fulfilled in all respects” its responsibilities as trustee.

‘Outrageous, Baseless’

“The allegations by the New York Attorney General are outrageous, baseless, unsupported by fact and law, and we will fight them if necessary in court,” he said. “The AG’s action is misguided and fails to comprehend the role of the trustee and the benefit the settlement would provide to investors.”

Bank of America and Countrywide separately face liability for “persistent illegality” in breaching contractual promises about the quality of loans, as well as failing to provide complete mortgage files, Schneiderman said in court papers.

Lawrence Grayson, a spokesman for Bank of America, declined to comment.

The attorney general’s action “raises significant doubt” that the $8.5 billion settlement will move forward as proposed, JMP Securities said in a research note.

‘Limited Role’

BNY Mellon previously has argued that mortgage-bond trustees’ responsibilities to investors aren’t as extensive as sometimes claimed.

Asked about a February lawsuit by investors who had been unable to get it to sue Countrywide after being presented with evidence of loans being of lesser quality than represented by than lender, Kevin Heine, a BNY Mellon spokesman, said then that the trustee has “a limited role that is distinct from the seller and the servicer and contractually limited by the pooling and servicing agreements.”

That case, by anonymous investors behind a series of limited liability companies named Walnut Place, included BNY Mellon as a nominal defendant.

The case is In the matter of Bank of New York Mellon, 651786/2011, New York State Supreme Court, New York County (Manhattan).

To contact the reporters on this story: David McLaughlin in New York at dmclaughlin9@bloomberg.net; Jody Shenn in New York at jshenn@bloomberg.net; Karen Freifeld in New York at kfreifeld@bloomberg.net

To contact the editors responsible for this story: Michael Hytha at mhytha@bloomberg.net; Alan Goldstein at agoldstein5@bloomberg.net

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