Bank of America Cleared on $1.3B Fraud Verdict

     MANHATTAN (CN) — Upending a nearly $1.3 judgment today, the Second Circuit said Bank of America did not commit fraud when one of its subsidiaries sold bad subprime loans.
     U.S. District Judge Jed Rakoff had set the damages nearly two years ago after a jury found that Bank of America and its subsidiary Countrywide Home Loans violated mail and wire fraud laws.
     Though Rakoff said the “brazen fraud” had hurt “the financial system as a whole,” the Second Circuit reversed Monday for the banks, saying the bad loans breached only contract laws.
     It is uncertain whether any part of Rakoff’s $1.267 billion penalty will stand in connection to the banks’ breach of contract.
     Writing for a three-person panel Monday, U.S. Circuit Judge Richard Wesley said deception is “the key distinction between fraud and a contractual breach,” without which the fraud charges must fail.
     “In essence, the government’s theory would convert every intentional or willful breach of contract in which the mails or wires were used into criminal fraud,” Wesley wrote.
     Prosecutors also provided no proof that the banks made guarantees as to the future quality of the investments, the Second Circuit found.
     Language within Countrywide’s contract provisions “constitutes a present promise, made at the time of execution, to provide investment-quality loans at the future delivery date,” Wesley wrote, noting there was no proof that Countrywide intended to honor those representations.
     Bank of America purchased Countrywide in 2008 after the housing lender was one of the first high-profile financial institutions to fail as the U.S. economy spiraled downward into the Great Recession. Countrywide became known for selling subprime home loans to just about anybody, including those with very little income or ability to pay their mortgages.
     The U.S. government joined the case against Countrywide after a former executive with the bank filed whistleblower claims in 2012. They said, in the months preceding the 2007 housing crash, Countrywide had induced Freddie Mac and Fannie Mae to buy inflated securities while knowing they were not investment quality.
     Rakoff had order had former Countrywide executive Rebecca Mairone to pay $1 million in damages.
     Court documents say Mairone worked at what was known internally at Countrywide as the “Hustle,” a program designed to quickly sell subprime loans to Freddie Mac and Fannie Mae. Prosecutors alleged Mairone had disregarded warnings that the loans being sold were of poor investment quality during the program.
     The case is the first to be prosecuted in which a banking executive has been found guilty under the 1989 Financial Institutions Reform, Recovery, and Enforcement Act. FIRREA was created in the wake of the savings and loan crisis.
     During trial, Freddie Mac employees and former Countrywide executives testified about the contracts, stating that statements about the investment quality were made only during the execution of the contracts.
     A Bank of America spokesman said the financial institution was pleased with the ruling. A spokesman for U.S. Attorney Preet Bharara declined to comment.

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