Court backs Bank of America
A federal appeals court dealt a blow to the federal government’s effort to hold Bank of America accountable for the sale of shoddy mortgages before the financial crisis, overturning a $1.27 billion penalty the bank had been ordered to pay in the so-called “hustle” case.
A three-judge panel ruled on Monday that federal prosecutors had failed to prove that Bank of America’s Countrywide unit had defrauded Fannie Mae and Freddie Mac, the government-backed mortgage firms, when it sold them troubled loans.
The judges said that while Countrywide em-
ployees may have sold loans in 2007 and 2008 that were not of the quality that was promised in the contracts with Fannie and Freddie, there was no evidence that these sales — an element of a loan program at Countrywide that was known informally as hustle — were part of a deliberate deception.
“The trial evidence fails to demonstrate the contemporaneous fraudulent intent necessary to prove a scheme to defraud,” Judge Richard Wesley wrote in a 31-page ruling.
The ruling by the 2nd U.S. Circuit Court of Appeals is one of a few setbacks in the Justice Department’s prosecution of Wall Street after the mortgage crisis. It is also a disappointment for Preet Bharara, the U.S. attorney for the Southern District of New York, who brought the prosecution against Bank of America and called its practice of rubber-stamping risky loans and selling them to Fannie Mae and Freddie Mac “spectacularly brazen.”
The bad lending ultimately required a taxpayer-financed bailout of the nation’s biggest banks, including Bank of America.
In 2014, Judge Jed Rakoff of the U.S. District Court in Manhattan ordered the bank to pay a $1.27 billion penalty in the hustle case. But that sum is a small fraction of the tens of billions of dollars the bank has paid in legal fees and settlements related to Countrywide, which Bank of America bought in 2008. Since 2010, Bank of America has spent $37 billion on litigation expenses, most of it related to the legal fallout from the financial crisis.
The hustle case stood out because in addition to Bank of America, prosecutors had sought to hold Rebecca Mairone, a former Countrywide executive, liable for the faulty loans.
It also represented a departure for Bank of America, which settled most of its mortgage-related charges before they went to trial. But from the beginning, the bank’s lawyers were betting they could win the hustle case.
“The 2nd Circuit understood this was a massive government overreach from the beginning,” said Josh Rosenkranz, who represents Mairone. “The message is that government should stop looking for fraud where it doesn’t exist.”
The U.S. can ask the entire panel of the appeals court judges to reconsider the ruling. A spokesman for Bharara declined to comment on the decision.
The case was called hustle because the government’s case involved a program at Countrywide known as the High-Speed Swim Lane that the lender created to sell mortgages to Fannie and Freddie as the subprime mortgage market was imploding.
During the trial, in October 2013, federal prosecutors accused Mairone of overseeing the high-speed lane program that pushed through loans to unqualified buyers and ultimately failed, causing more than $1 billion in losses. The faster that employees originated loans, the higher their bonuses, according to testimony.
The appeals court ruled that Countrywide’s contracts with Fannie and Freddie may have including false statements. But even “intentional” contract breaches did not constitute fraud on the part of the lender, the ruling said.
The ruling is also a vindication for Mairone, who worked at JPMorgan Chase at the time of the trial and had to leave her job after the jury convicted her on one count of fraud, her lawyer said.
The appeals court ruling means Mairone does not have to pay the $1 million penalty that the district court had ordered.
The government’s case was based on a whistleblower complaint originally brought by Edward O’Donnell, a former Countrywide executive.
O’Donnell received $57 million from the government for his role in bringing the issues to light. His lawyer said the appeals court ruling would not affect that payout, which was tied more broadly to his work helping federal prosecutors reach a $16.65 billion settlement with Bank of America in August 2014.