Feds Get Around to Suing Bank of America

Jonathan Weil joined Bloomberg News as a columnist in 2007, and his columns on finance and accounting won Best in the Business awards from the Society of American Business Editors and Writers in 2009 and 2010.
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The wheels of civil liability turn slowly at the Securities and Exchange Commission, which was doubly evident today when the agency brought two cases against big banks dating back to the credit-bubble era, including one where the agency tag-teamed with the Justice Department.

The first was against the Swiss bank UBS AG, which agreed to pay $50 million tosettle claims of misleading investors in 2007 while structuring and selling a collateralized debt obligation. This is a fancy term for a bond, except the bond in this case was one of those extra-complex sorts where the collateral included derivatives linked to other subprime mortgage bonds.

The second case is splashier, but also well-aged. The SEC sued Bank of America Corp. and two subsidiaries in a federal district court in North Carolina, accusing them of defrauding investors in an $855 million mortgage bond called BOAMS 2008-A. The SEC allegedthat Bank of America failed to tell investors that more than 70 percent of the mortgages backing the bond came from mortgage brokers that weren't affiliated with the company -- which the SEC says was an important fact because the loans were horrible.

There's also a parallel civil case against Bank of America by the Justice Department, which contains some gems, such as this section:

"Moreover, more than 22% of the mortgages serving as collateral for the BOAMS 2008-A securitization were provided to purportedly self-employed borrowers and, of those, nearly 70% were `stated income/stated assets' mortgages, meaning that BOA-Bank did not verify the income these borrowers claimed to earn or the assets they claimed to own. These mortgages share many of the same characteristics of the now infamous subprime 'Liar Loans,' although Defendants misleadingly referred to them as `PaperSaver' mortgages."

Notably, the SEC didn't accuse Bank of America of committing fraud intentionally. Rather, the agency sued Bank of America under two antifraud sections of the securities laws that only require the SEC to prove negligence to win its case.

By comparison, the Justice Department accused Bank of America of "knowingly and willfully" making "fraudulent statements and representations." It isn't clear why the SEC didn't go so far in its claims against the company.

The Justice Department's lawsuit includes two counts for alleged violations of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 -- which is the same statute it used earlier this year to file suit against the credit-rating company Standard & Poor's. The Justice Department's complaint said the investors in the bond sold by Bank of America included Wachovia (now part of Wells Fargo & Co.) and the Federal Home Loan Bank of San Francisco. Total investor losses topped $100 million, prosecutors said.

The best part for the public is that the Bank of America cases are being litigated in court. So we might actually find out if the government's allegations are true. Far better to file civil claims against a powerful corporate defendant and take it to trial, than pursue some weak-kneed settlement where the government collects a fine and the two sides obscure what happened so that you can't tell if the feds ever had a real case. Oddly, though, neither the SEC nor the Justice Department filed claims against any individuals, in yet another instance of alleged frauds that somehow occurred without human intervention.

Why it took five years or longer after the securities were sold for the government to bring these cases, I have no idea. But that's the way the system works often. By the time the government's lawyers get around to suing anyone for alleged offenses from the last crisis, the financial world has moved on to inventing new ways to blow itself up that the cops don't stand a chance of detecting. Some things never change.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Jonathan Weil at jweil16@bloomberg.net