BofA Urges Dismissal of U.S. Mortgage-Fraud Lawsuit

Bank of America Corp. asked a judge to dismiss a U.S. Justice Department lawsuit in which it’s accused of misleading investors about the quality of loans tied to $850 million in mortgage-backed securities.

The instruments were sold to two “sophisticated” financial institutions around 2007 and 2008, a few months before the U.S. real estate market collapsed, the bank said in a filing yesterday in federal court in Charlotte, North Carolina, where it’s based. “Tellingly,” the buyers haven’t sued, it said.

The U.S. seeks to “fundamentally rewrite the securities laws by criminalizing immaterial misstatements,” the bank said. “With the benefit of hindsight, the government alleges that the bank should have provided these investors with more information about the risk of their investment.”

The U.S. is seeking to punish companies for actions it says helped trigger the financial crisis. The North Carolina case and others like it rely on a law dating to the savings-and-loan crisis of the 1980s which allows the government to punish actions taken too long ago to be covered by other laws. It also lets the U.S. seek larger damages awards.

In yesterday’s filing, Bank of America said the law cited in the government’s complaint is inapplicable because the bank didn’t lie to a government agency or make false statements to customers in banking or insurance transactions.

“The government insists on trying to hammer a square peg into a round hole,” the bank said.

Dismissal Recommended

A magistrate judge on March 27 recommended that the case be dismissed without giving the government the option to fix any defects. That recommendation to the U.S. District Court ignored legal standards for bringing a lawsuit and relied on incorrect factual findings, the Justice Department said in an April 10 court filing.

If a district judge agrees with the magistrate, the U.S. will have a chance to appeal that decision as well.

If the case is dismissed, it will be a first for about a dozen companies that have been targeted under the Financial Institution Reform, Recovery and Enforcement Act of 1989, or Firrea, which lets the government sue people or groups, rather than charge them with a crime, for fraud that affects a federally insured financial institution.

Criminal Prosecution

The rarely used law has advantages: It imposes a lower burden of proof than a criminal prosecution and threatens penalties of more than $1 million for each fraudulent statement or act. Firrea also gives prosecutors 10 years to file, rather than the five years under some criminal and civil statutes. Banks fighting to get Firrea cases dismissed have yet to succeed.

Lia Bantavani, a spokeswoman for the Justice Department, said in an e-mail the agency would be filing additional arguments in its favor in the next two weeks and declined to comment further on yesterday’s filing by the bank.

In a New York case, Bank of America was found liable by a federal jury last year after a trial over claims that its Countrywide unit defrauded Fannie Mae and Freddie Mac by selling them billions of dollars in bad mortgages. U.S. District Judge Jed Rakoff is now weighing a penalty, with prosecutors seeking the maximum of $863 million.

In the North Carolina case, the Justice Department said the lender portrayed its bonds as being backed by prime loans vetted by its staff, even though most were riskier wholesale mortgages originated by outside brokers. Some were “PaperSaver” loans that didn’t require proof of borrowers’ income, the U.S. said.

In a fraud lawsuit by the U.S. Securities and Exchange Commission over the same securities, the same magistrate judge recommended on March 31 that Bank of America’s motion to dismiss the case be denied, saying the regulator had properly laid out its claims.

The case is U.S. v. Bank of America Corp., 13-cv-00446, U.S. District Court, Western District of North Carolina (Charlotte).

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