Appeals court reverses fraud finding against Bank of America

Bank of America on Monday landed a rare victory in a financial crisis-era lawsuit when a federal appeals court overturned a jury’s finding that it was liable for fraud over mortgages issued by its Countrywide Financial unit.

A three-judge panel of the 2nd U.S. Circuit Court of Appeals in New York City also threw out the $1.27 billion penalty imposed after trial. The case, which involved a Countrywide program nicknamed “Hustle,” had been a high-profile win for prosecutors.

Charlotte-based Bank of America acquired former subprime mortgage lender Countrywide in 2008, leading to billions of dollars in losses from legal settlements, penalties and bad loans. The case was one of the last major crisis-era lawsuits still lingering for the bank, which has been working to put its legal troubles behind it.

In their ruling, the judges said there was insufficient evidence that Countrywide Financial committed mail and wire fraud in late 2007 and 2008. Instead, they sided with the bank’s argument that at most the evidence showed an “intentional breach of contract.”

A bank spokesman said the company was pleased with the decision. Prosecutors had no immediate comment.

Better Markets, a non-profit that promotes financial reform, said the decision was “hyper-technical” and would provide “a road map for Wall Street to get away with more fraud in the future.” The group urged the decision be reversed on further appeal to the full 2nd Circuit appeals court or the U.S. Supreme Court.

A jury in October 2013 found the bank liable after the government said Countrywide lied about the quality of mortgages it passed along to financial firms Fannie Mae and Freddie Mac. In July 2014, Judge Jed Rakoff in Manhattan ordered the bank to pay $1.27 billion in civil penalties.

The jury had also ruled against a former Countrywide executive named in the suit, Rebecca Mairone. One of the few executives held personally liable in a financial crisis case, Mairone had been ordered to pay $1 million in civil penalties, but that ruling was also tossed out by the appeals court.

“She’s been vindicated,” said Michael Hefter, an attorney who represented Mairone. “We thought this was a case from the beginning that never should have been brought, and now the 2nd Circuit has confirmed that.”

The suit, filed in 2012, became the first civil fraud case brought by the Department of Justice over mortgage loans sold to Fannie or Freddie. The government alleged that the Hustle program – known as “High Speed Swim Lane” or “HSSL” – rapidly processed loans without regard for their quality.

Bank of America, however, said in the court filings that evidence presented at trial showed the quality of the Hustle loans was “well within” the standards Fannie and Freddie expected. The bank also claimed that Countrywide did not misrepresent the quality of the loans when it sold them.

In its decision Monday, the appeals court said “the trial record reveals a basic deficiency in proof under the statutes, and accordingly, we conclude the evidence is insufficient to sustain the jury’s verdict.”

The case was initially brought by former Countrywide executive Ed O’Donnell under a federal whistleblower statute. According to The Wall Street Journal, he did not receive any payout from the case because of the appeal, although he did receive nearly $58 million from another suit against the bank.

The financial impact of Monday’s decision on Bank of America is unclear. The bank said it doesn’t comment on reserves set aside for individual legal matters.

The Hustle case was one of the many mortgage-related blows to the bank in recent years. Just weeks after Judge Rakoff ordered the bank to pay the $1.27 billion penalty, Bank of America agreed to a $16.65 billion settlement over toxic mortgage bonds that was the biggest civil settlement ever between a single company and the government.

The Associated Press and staff writer Deon Roberts contributed.

This story was originally published May 23, 2016 at 11:38 AM with the headline "Appeals court reverses fraud finding against Bank of America."