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BofA Settlement Process ‘Seriously Flawed,’ Report Says

Bank of America Corp.’s $8.5 billion mortgage-bond settlement was reached through a “seriously flawed” process, said an expert for American International Group Inc. (AIG), which has challenged the deal.

The New York state judge considering the settlement should conduct a ”full and detailed inquiry” before approving it, Boston University law professor Tamar Frankel said in a court filing yesterday in Manhattan. Bank of New York Mellon Corp., the trustee for investors in the securities, is seeking approval for the agreement.

“The process in which the settlement was negotiated and reached is seriously flawed, as the trustee acted in conflict of interest and failed to exercise due care,” Frankel said.

The settlement, which would resolve claims over Countrywide Financial mortgage bonds, was reached in 2011 and is scheduled to be considered for approval at a hearing beginning May 30 in New York State Supreme Court.

The settlement has the support of a group of institutional investors, including BlackRock Inc. (BLK) and Pacific Investment Management Co. It has drawn criticism from AIG. The insurance company has said in court papers that Bank of America is “drastically underpaying” and that the settlement was the result of a “highly conflicted process.”

Violated Law

New York Attorney General Eric Schneiderman in 2011 accused BNY Mellon of violating state law in its role as trustee. The bank acted with a conflict of interest in reaching the agreement and engaged in “repeated fraud and illegality.” New York and Delaware have intervened in the case.

Kevin Heine, a spokesman for BNY Mellon, declined to comment on Frankel’s filing. The bank has previously said that it fulfilled its responsibilities as trustee and that the proposed settlement is reasonable. Lawrence Grayson, a spokesman for Charlotte, North Carolina-based Bank of America, declined to comment.

Frankel argued Justice Barbara Kapnick, who is overseeing the case, shouldn’t grant deference to BNY Mellon in considering the settlement. Much of Frankel’s filing is redacted.

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

To contact the reporter on this story: David McLaughlin in New York at dmclaughlin9@bloomberg.net

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net

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