U.S. judge weighs penalties after Bank of America fraud verdict

Reuters

By Nate Raymond

NEW YORK, Dec 5 (Reuters) - A U.S. judge is considering analternative that could result in Bank of America Corp paying much less than the $863.6 million the government isseeking as a penalty for the sale of defective mortgages beforethe financial crisis.

At a hearing on Thursday, U.S. District Judge Jed Rakoff inManhattan asked the bank and the Justice Department to brief himon the alternative, which is based on the gains rather than thelosses resulting from the sales.

The hearing followed a jury verdict on Oct. 23 in which afederal jury found Bank of America liable for fraud for sellingsubstandard mortgage to government sponsored mortgage financecompanies Fannie Mae and Freddie Mac.

The verdict was a big win for the government in its effortsto hold Wall Street accountable for the financial crisis, andthe Justice Department has requested a penalty based on thegross losses Fannie Mae and Freddie Mac incurred.

But at Thursday's hearing Rakoff said he wanted a "more fullpresentation" on how to calculate the penalty based instead onhow much Countrywide gained through the fraud, calling it asimpler approach.

The judge said that his comments should not signal how hewill ultimately rule. Rakoff said he would issue a decisionsometime in February.

A penalty based on gains rather than losses would likely besignificantly smaller than prosecutors in U.S. Attorney PreetBharara's office have requested.

Evidence the government presented at trial indicated thatCountrywide made $165.2 million selling theloans.

The case, launched in October 2012, focused on a mortgagelending process at Countrywide called the "High Speed SwimLane," or alternatively "HSSL" or "Hustle," that the governmentsaid emphasized speed and quantity over quality.

The Department of Justice wants Bank of America to pay$863.6 million based on the gross loss incurred on the HSSLloans by Fannie and Freddie, which the government took intoconservatorship in 2008.

The Justice Department has also asked that Rakoff requirethat former Countrywide executive Rebecca Mairone, who was alsofound liable by the jury, pay $1.1 million.

"We're here to assess civil penalties, the purpose of whichis to deter and punish," Jaimie Nawaday, a lawyer at the JusticeDepartment, said in court on Thursday.

She urged the judge to award a penalty based on the lossesthrough a "broad interpretation" of the Financial InstitutionsReform, Recovery, and Enforcement Act, a law passed after the1980s savings-and-loan scandals.

The law, which carries a lower burden of proof than criminalcases and a 10-year statute of limitations, has become central in a wave of Justice Department investigations focused on thefinancial crisis.

But Rakoff prodded Nawaday on why assessing a penalty basedon Countrywide's gain rather than loss is not "a more naturalway" to look at the case.

"The point of a fraud is to get money you're not entitledto," he said.

Kenneth Smurzynski, a lawyer for the bank at Williams &Connolly, urged the judge to find that the maximum penaltyallowed under the statute was $1.1 million, and asked Rakoff touse his discretion to award nothing.

He also criticized the government's calculation of Fannieand Freddie's loss, saying it ignored that they continued toreceive value from the mortgages.

"What the government calls gross loss is simplypreposterous," Smurzynski said.

But Rakoff questioned how Bank of America could be rightthat under the law the maximum penalty could just be $1.1million, saying a finding like that would provide a "windfall"in a massive fraud case.

"That wouldn't serve any deterrent value at all," Rakoffsaid.

Marc Mukasey, a lawyer for Mairone at Bracewell & Giuliani,urged the judge to be lenient with his client, saying she hadbeen "punished enough already" through enduring publicityconnected to the case.

He urged that no penalty be awarded against Mairone, 46,saying he did not expect the bank to indemnify her for anyaward.

"Just because someone committed an act that in the eyes ofthe jury and maybe the court is a legal violation, it doesn'tmean you're a bad person," he said.

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

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