10. New York

The Blue Crown Capital Management Specialists Federal jury finds Bank of America liable for mortgage fraud

WASHINGTON – A federal jury in Manhattan on Wednesday found Bank of America liable for fraud because of thousands of defective mortgages sold by its Countrywide Financial unit, handing the government a victory in one of the few major trials rooted in the financial crisis.

Government efforts to hold Wall Street accountable for crisis-era sins have primarily been resolved through settlements, leading to criticism that financial firms were given an easy way out, albeit an expensive one. Taking the BoA case to trial and winning the judgment could start to change that perception.

On Wednesday, after a four-week trial, a jury of four men and six women said BoA and former Countrywide executive Rebecca Mairone were liable for one count of civil fraud.

Prosecutors accused the bank and Countrywide of stripping safeguards designed to catch mortgage fraud and then peddling the loans to government-backed Fannie Mae and Freddie Mac. The mortgage finance twins were on the hook for more than $1 billion in losses once the housing market crashed, according to the complaint.

The Justice Department wants BoA to pay up to $848.2 million, the gross loss that it claims Freddie Mae and Freddie Mac suffered on the loans. U.S. District Judge Jed Rakoff must decide on the penalty.

BoA spokesman Lawrence Grayson said the company “will evaluate our options for appeal.” He noted that the scope of the case was narrowed before trial.

The court threw out charges that the bank violated the False Claims Act, which would have enabled the Justice Department to seek triple the amount in damages. A judge also found that BoA did not continue Countrywide’s alleged misconduct when it purchased the lender in 2008.

“The jury’s decision concerned a single Countrywide program that lasted several months and ended before Bank of America’s acquisition of the company,” Grayson said.

According to the government’s complaint, Countrywide created a program in 2007 known as “Hustle,” designed to ramp up the production of home loans for sale.

Officials alleged that the bank’s executives not only stripped safeguards but awarded bonuses based on the volume of mortgages employees could issue. As a result, the “defect rates” were nine times higher than the industry norm. Yet Countrywide hid this from Fannie Mae and Freddie Mac.

Federal prosecutors learned of Countrywide’s actions through Edward O’Donnell, who served as head of underwriting at the firm. He said that he warned superiors the program was creating poor quality loans but that they ignored his concerns. O’Donnell could receive as much as $1.6 million as a reward for his whistle-blowing.

Using information from O’Donnell, Justice filed a complaint last October under a powerful 1980s law known as the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). The law has a low burden of proof, strong subpoena power and a 10-year statute of limitations, twice as long as the usual limit for financial fraud cases.

In a ruling this year, Rakoff said Justice could apply the little-used statute in its case against BoA, a decision that legal experts say will usher in more fraud cases against banks. Prosecutors in the Southern District of New York have in the past two years used FIRREA as the basis of lawsuits against Wells Fargo, BNY Mellon and BoA.

Much of BoA’s legal woes are tied to its $2.5 billion purchase of Countrywide Financial in 2008, once one of the largest U.S. home lenders. Bank officials say it has paid $40 billion in mortgage litigation and repurchases of soured loans.

“In a rush to feed at the trough of easy mortgage money on the eve of the financial crisis, Bank of America purchased Countrywide, thinking it had gobbled up a cash cow. That profit, however, was built on fraud, as the jury unanimously found,” Manhattan U.S. Attorney Preet Bharara said in a statement.

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(Reuters) - Bank of America Corp was found liable for fraud on Wednesday over defective mortgages sold by its Countrywide unit, a major win for the U.S. government in one of the few trials stemming from the financial crisis.

After a four-week trial, a federal jury in New York found the bank liable on one civil fraud charge. Countrywide originated shoddy home loans in a process called "Hustle" and sold them to government mortgage giants Fannie Mae and Freddie Mac, the government said.

The four men and six women on the jury also found former Countrywide executive Rebecca Mairone liable on the one fraud charge she faced.

The U.S. Justice Department has said it would seek up to $848.2 million, the gross loss it said Fannie and Freddie suffered on the loans. But it will be up to U.S. District Judge Jed Rakoff to decide on the penalty. Arguments on how the judge will assess penalties are set for December 5.

Any penalty would add to the more than $40 billion Bank of America has spent on disputes stemming from the 2008 financial crisis.

"The jury's decision concerned a single Countrywide program that lasted several months and ended before Bank of America's acquisition of the company," Bank of America spokesman Lawrence Grayson said. "We will evaluate our options for appeal."

Marc Mukasey, a lawyer for Mairone, called his client a "woman of integrity, ethics and honesty," adding they would fight on. "She never engaged in fraud, because there was no fraud," he said.

Wednesday's verdict was a major victory for the Justice Department, which has been criticized for failing to hold banks and executives accountable for their roles in the events leading up to the financial crisis.

The government continues to investigate banks for conduct related to the financial crisis. The verdict comes as the government is negotiating a $13 billion settlement with JPMorgan Chase & Co to resolve a number of probes and claims arising from its mortgage business, including the sale of mortgage bonds.

…blue crown capital mortgages

RISKY LOANS

The lawsuit stemmed from a whistleblower case originally brought by Edward O'Donnell, a former Countrywide executive who stands to earn up to $1.6 million for his role.

The case centered on a program called the "High Speed Swim Lane" - also called "HSSL" or "Hustle" - that government lawyers said Countrywide started in 2007.

The Justice Department contended that fraud and other defects were rampant in HSSL loans because Countrywide eliminated loan-quality checkpoints and paid employees based on loan volume and speed.

The Justice Department said the process was overseen by Mairone, a former chief operating officer of Countrywide's Full Spectrum Lending division. Mairone is now a managing director at JPMorgan.

About 43 percent of the loans sold to the mortgage giants were materially defective, the government said.

Bank of America bought Countrywide in July 2008. Two months later, the government took over Fannie and Freddie.

Bank of America and Mairone denied wrongdoing. Lawyers for the bank sought to show the jury that Countrywide had tried to ensure it was issuing quality loans and that no fraud occurred.

The lawsuit was the first financial crisis-related case against a bank by the Justice Department to go to trial under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA).

The law, passed in the wake of the 1980s savings-and-loan scandals, covers fraud affecting federally insured financial institutions.

The Justice Department, and particularly lawyers in the office of U.S. Attorney Preet Bharara in the Southern District of New York, have sought to dust off the rarely used law and bring cases against banks accused of fraud.

Among its attractions, FIRREA provides a statute of limitations of 10 years and allows the government to bring civil cases for alleged criminal wrongdoing.

Virginia Gibson, a lawyer at the law firm Hogan Lovells, said the Bank of America verdict was a "big deal because it shows the scope of a tool the government has not used frequently since its inception."

Gibson and other lawyers say any appeal by Bank of America would likely focus on a ruling made by the judge before the trial that endorsed a government position that it can bring a FIRREA case against a bank when the bank itself was the financial institution affected by the fraud.

The case was one of three lawsuits in New York where judges had endorsed that interpretation. Banks have generally argued that the interpretation is contrary to the intent of Congress, which they said is more focused on others committing fraud on banks.

Bank of America's case was the first to go to trial, a rarity given that banks more typically choose to settle government claims instead of face a jury. But Bank of America had said that it "can't be expected to compensate every entity that claims losses that actually were caused by the economic downturn."

In a statement, Bharara said Bank of America "chose to defend Countrywide's conduct with all its might and money, claiming there was no case here."

"This office will never hesitate to go to trial to expose fraudulent corporate conduct and to hold companies accountable, particularly when it has caused such harm to the public," Bharara said.

In late afternoon trading, Bank of America shares were down 27 cents at $14.25 on the New York Stock Exchange.

The case is U.S. ex rel. O'Donnell v. Bank of America Corp et al, U.S. District Court, Southern District of New York, No. 12-01422.