Bank of America Corp.’s Merrill Lynch & Co. unit must face a lawsuit by the Federal Housing Finance Agency, the conservator for Fannie Mae and Freddie Mac, over mortgage-backed securities sold by the investment bank.
U.S. District Judge Denise Cote in New York yesterday denied Merrill’s request to dismiss the FHFA’s securities law and fraud claims, except for fraud claims based on loan-to-value ratios and ownership-occupancy reporting. The judge said FHFA had failed to sufficiently allege fraudulent intent for those claims.
The judge rejected Merrill Lynch’s request to throw out the FHFA’s claims for recession and for punitive damages.
“The amended complaint adequately supports its demand for punitive damages,” the judge said in the ruling. “FHFA alleges that the defendants acted recklessly by seeking to profit from ever more risky mortgage lending while, at the same time, passing on the risk, and ultimately the losses, associated with these practices to the public via their sale of securities to Fannie Mae and Freddie Mac.”
The FHFA sued Merrill Lynch and other investment banks last year as conservator of Freddie Mac and Fannie Mae, the government-sponsored enterprises created to support the housing market by buying residential mortgages in the secondary market. It alleges negligent misrepresentations and fraud related to the mortgage-backed securities the banks sold from 2005 to 2007.
Lawrence Grayson, a spokesman for Charlotte, North Carolina-based Bank of America, declined to comment on the ruling. Bank of America completed its acquisition of Merrill Lynch on Jan. 2, 2009.
Sixteen of the FHFA’s lawsuits are before Cote. The FHFA’s case against Bank of America’s Countrywide Financial unit, at one point the largest originator of residential mortgages, is before a federal judge in Los Angeles who last month denied Countrywide’s motion to dismiss the claims for being brought to late.
Cote earlier denied UBS AG’s and JPMorgan Chase & Co.’s request to dismiss FHFA’s claims.
The case is Federal Housing Finance Agency v. Merrill Lynch & Co., 11-06202, U.S. District Court, Southern District of New York (Manhattan.)