While Bank of America is still in negotiations with the Justice Department over its sale of mortgage-backed securities before the financial crisis, it was ordered by a federal judge Wednesday to shell out $1.3 billion in a separate case.
Last year, Bank of America was found liable for fraud for a program run by Countrywide, the mortgage company it acquired in 2008. The program, called the "High Speed Swim Lane" or "Hustle," incentivized Countrywide employees to pump out mortgages as the housing market was collapsing. Jed Rakoff, the federal judge overseeing the trial, wrote in his order that the program was "the vehicle by which Countrywide had perpetrated a subsequent fraudulent scheme from August 2007 to May 2008." Rakoff described the program as a "vehicle for brazen fraud." Prosecutors had originally asked for a $864 million fine.
"We believe that this figure simply bears no relation to a limited Countrywide program that lasted several months and ended before Bank of America's acquisition of the company. We are reviewing the ruling and we'll assess our appellate actions," said Bank of America spokesman Lawrence Grayson.
Federal prosecutors brought the case against Bank of America under a law dating from the savings and loan crisis that allows prosecutors to sue companies that damage federally insured banks. The prosecutors argued that Bank of America could be sued under the law because banks invested in Fannie and Freddie stock and debt, and had those investment wiped out when the two companies nearly collapsed thanks to bad mortgage investments.
In last year's jury trial for the Countrywide case, Bank of America was found liable for fraud, as was a former Countrywide executive, Rebecca Mairone.
In his order today, Rakoff said that Freddie Mac and Fannie Mae had paid for $2.9 billion loans from the Hustle program. Prosecutors claimed that Countrywide had made $165 million from the program. Rakoff came to his $1.3 billion figure by relying on an expert who worked with prosecutors who said that 57% of the Hustle loans were not "materially defective," leaving 42% that were and bringing the figure to $1.3 billion.
Mairone was ordered to pay $1 million herself — although she can pay in installments, so as not to "strain her resources to the limit."
"We continue to maintain that Rebecca never intended to defraud anyone and never did defraud anyone. Unfortunately, more powerful people chose her as a scapegoat because they thought she was an easy target. We will fight on to clear her name," said her attorney Marc Mukasey.
"Not a little responsibility for this fraud can be laid at her doorstep," Rakoff wrote. And while her lawyers argued during the trial that Mairone was not solely responsible for the Hustle program, "the fact that other, higher-level individuals arguably participated in the fraud were, for whatever reaons, not charged by the Government does not significantly lessen Ms. Mairone's culpability for her leading role in the fraud," Rakoff wrote.
Bank of America is also in separate negotiations with the Justice Department over a settlement to end an investigation into the sale of mortgage-backed securities before the financial crisis to investors by Countrywide, Bank of America, and Merrill Lynch, which Bank of America acquired in 2008. The Wall Street Journal reported that Bank of America had offered $13 billion, but the Justice Department turned it down. Bank of America's profits fell 43% in the second quarter of this year thanks to setting aside $4 billion in its reserves for litigation.