U.S. Magistrate Judge David Cayer in Charlotte, N.C., recommended yesterday that Bank of America’s request to dismiss the SEC case be denied. The complaint adequately alleged the bank didn’t disclose in offering documents for the securities that the bulk of the mortgages pooled in them were bought wholesale from third-party brokers, he said.
That recommendation and one in a separate case come as the U.S. seeks to punish companies for wrongdoing that helped trigger the financial crisis.
Cayer said in a March 27 recommendation that the Justice Department’s lawsuit seeking to hold Bank of America liable under the Financial Institutions Reform, Recovery and Enforcement Act, or FIRREA, should be thrown out. The 1989 law with a 10-year statute of limitations has become a tool for federal prosecutors bringing civil claims for alleged wrongdoing in the buildup to the 2008 financial crisis.
The magistrate judge’s findings in both cases will be reviewed by U.S. District Judge Max O. Cogburn Jr. The bank or the government can then appeal any order by Cogburn.
In his recommendation to dismiss the FIRREA case, Cayer found that the government didn’t properly establish its claims that the bank, the second-biggest lender in the U.S., lied to the Federal Housing Finance Board.
Cayer said the government failed to make a compelling argument that Bank of America’s alleged misstatements were “material.” The fraud statute on which it relied didn’t pertain to the purchase of securities, he said.
If that case is dismissed, it will be a first for about a dozen companies that have been targeted under FIRREA, which allows the government to sue an individual or group, rather than charge them with a crime, for fraud that affects a federally insured financial institution.
In the SEC case, which alleged fraud over sales of securities, the magistrate judge concluded that the complaint lays out “sufficient facts to establish that defendants negligently made material misrepresentations and omissions here.”
“We are reviewing the magistrate judge’s recommendation carefully,” Lawrence Grayson, a spokesman for Charlotte-based Bank of America, said in an email.
Both lawsuits seek penalties for a 2008 transaction in which Bank of America bundled about 1,200 jumbo, adjustable-rate mortgages for sale in the secondary market. About 70 percent of the mortgages were wholesale loans, a type of product the bank’s then-chief executive officer had called “toxic waste,” according to the SEC.
While the bank in December 2007 told Wachovia Corp. and the Federal Home Loan Bank of San Francisco, which bought about 98% of the securities, that most of mortgages were acquired wholesale, that wasn’t disclosed in the prospectus of the securities, according to today’s order.