Appeals court reverses fraud finding against Bank of America

Appeals court reverses fraud finding against Bank of America

The U.S. Second Circuit Court of Appeals has overturned a $1.27 billion penalty imposed on Bank of America over the alleged misrepresentation of mortgage-backed securities sold by Countrywide Financial Corp.to the GSEs through a program known as the High Speed Swim Lane (HSSL, commonly known as "Hustle"). The court says there was insufficient evidence that mail and wire fraud was committed by the bank's Countrywide Financial unit in late 2007 and 2008. U.S. Circuit Judge Richard Wesley said although evidence showed that Countrywide breached contracts to sell loans of a specified quality, no proof existed that it meant to deceive the buyers when those contracts were executed.

A federal appeals court Monday ruled in favor of Bank of America, reversing a lower court ruling.

A jury found Bank of America liable for fraud in the case in 2013.

"The trial evidence fails to demonstrate the contemporaneous fraudulent intent necessary to prove a scheme to defraud through contractual promises", Wesley wrote. A spokesman for Manhattan U.S. Attorney Preet Bharara, whose office oversaw the lawsuit and took it to trial, had no immediate comment.

The lawsuit was filed in 2012 following a whistleblower's complaint, and remains one of the biggest government enforcement cases to go to trial in connection with the USA housing meltdown and financial crisis.

A federal judge subsequently had sentenced Bank of America, which acquired Countrywide in 2008, to a $1.27 billion penalty.

Countrywide was one of many mortgage firms selling risky mortgages to Fannie Mae and Freddie Mac before the housing collapse.

Rakoff said this was the appropriate standard under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), which was adopted after the 1980s savings and loan scandal and the basis for Bank of America's liability.

The appeals panel said the government didn't prove the bank had meant to commit fraud when it signed deals with the housing entities, which it said was necessary in order to sustain the case. Bank of America appealed the decision. The 2nd Circuit, however, found a "basic deficiency" in proof. In 2014, JPMorgan Chase agreed to pay $13 billion, Citigroup came to a $7 billion deal with federal investigators, and Bank of America itself agreed to pay almost $17 billion in a settlement with federal regulators over allegations that it misled investors into buying risky, mortgage-backed securities.

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