Bank of America liable for Countrywide mortgage fraud


By Nate Raymond

NEW YORK, Oct 23 (Reuters) - Bank of America Corp was found liable for fraud on Wednesday over defective mortgagessold by its Countrywide unit, a major win for the U.S.government in one of the few trials stemming from the financialcrisis.

After a four-week trial, a federal jury in New York foundthe bank liable on one civil fraud charge. Countrywideoriginated shoddy home loans in a process called "Hustle" andsold them to government mortgage giants Fannie Mae andFreddie Mac, the government said.

The four men and six women on the jury also found formerCountrywide executive Rebecca Mairone liable on the one fraudcharge she faced.

The U.S. Justice Department has said it would seek up to$848.2 million, the gross loss it said Fannie and Freddiesuffered on the loans. But it will be up to U.S. District JudgeJed Rakoff to decide on the penalty. Arguments on how the judgewill assess penalties are set for Dec. 5.

Any penalty would add to the more than $40 billion Bank ofAmerica has spent on disputes stemming from the 2008 financialcrisis.

"The jury's decision concerned a single Countrywide programthat lasted several months and ended before Bank of America'sacquisition of the company," Bank of America spokesman LawrenceGrayson 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 wouldfight on. "She never engaged in fraud, because there was nofraud," he said.

Wednesday's verdict was a major victory for the JusticeDepartment, which has been criticized for failing to hold banksand executives accountable for their roles in the events leadingup to the financial crisis.

The government continues to investigate banks for conductrelated to the financial crisis. The verdict comes as thegovernment is negotiating a $13 billion settlement with JPMorganChase & Co to resolve a number of probes and claimsarising from its mortgage business, including the sale ofmortgage bonds.


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

The case centered on a program called the "High Speed SwimLane" - also called "HSSL" or "Hustle" - that government lawyerssaid Countrywide started in 2007.

The Justice Department contended that fraud and otherdefects were rampant in HSSL loans because Countrywideeliminated loan-quality checkpoints and paid employees based onloan volume and speed.

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

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

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

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

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

The law, passed in the wake of the 1980s savings-and-loanscandals, covers fraud affecting federally insured financialinstitutions.

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

Among its attractions, FIRREA provides a statute oflimitations of 10 years and allows the government to bring civilcases 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 itshows the scope of a tool the government has not used frequentlysince its inception."

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

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

Bank of America's case was the first to go to trial, ararity given that banks more typically choose to settlegovernment claims instead of face a jury. But Bank of Americahad said that it "can't be expected to compensate every entitythat claims losses that actually were caused by the economicdownturn."

In a statement, Bharara said Bank of America "chose todefend 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 exposefraudulent 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 down27 cents at $14.25 on the New York Stock Exchange.

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

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