Bank of America (BAC) got a big dose of good news on Wednesday when a federal judge said that he was considering dismissing a case brought by the U. S. Department of Justice, which alleged that the bank misled investors about the quality of loans bundled into $850 million in mortgage-backed securities.
In a hearing, U.S. District Judge Max Cogburn said that he may follow the recommendation of U.S. Magistrate Judge David Cayer, who previously recommended that the case should be dismissed in March.
“DOJ may not have the evidence to try this as a fraud case," Cogburn said Wednesday, according to a report from Reuters.
The case against Bank of America is one in a series of prosecutions being brought by U.S. attorneys against financial institutions under the Financial Institution Reform, Recovery and Enforcement Act of 1989. The law allows the government to sue for fraud rather than just charge institutions with a crime when the alleged fraud is against a federally insured institution.
The recommendation for dismissal is significant because FIRREA cases don’t have the burden of proof for the state to meet as it does in criminal cases.
The DOJ suit, which was worked in tandem with the U.S. Attorney for the Western District of North Carolina, says Bank of America and several of its affiliates made intentionally false statements, failed to perform due diligence on loans and packed securitization deals with a “disproportionate amount of risky mortgages originated through third party mortgage brokers.”
According to the Reuters report, Cogburn also told assistant U.S. Attorney Daniel Ryan that the government needed to provide more substantial information to support its case.
It’s a similar message to the one that Cayer delivered in March.“The complaint contains no factual allegations that the defendants’ statements occurred within the jurisdiction of the FHFB or affected its decisions,” Cayer said when he suggested the case should be dismissed.
"Materiality cannot be inferred from the allegation that a government agency (FHFB) oversaw the recipient of the alleged misstatements (FHLB-SF). The government’s argument here is even less compelling.”
