U.S. judge says SEC lawsuit against Bank of America should proceed

Mon Mar 31, 2014 8:23pm EDT
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By Jonathan Stempel

(Reuters) - A federal judge on Monday recommended letting the U.S. Securities and Exchange Commission pursue a lawsuit against Bank of America Corp over $855 million of mortgage securities that soured during the global financial crisis.

U.S. Magistrate Judge David Cayer in Charlotte, North Carolina, where the bank is based, made the recommendation four days after urging dismissal of a related Department of Justice civil lawsuit, which alleged violations of a different law.

That ruling had been seen as a possible setback for government efforts to fight fraud by Wall Street in the sale of mortgage securities.

"We are reviewing the magistrate judge's recommendation carefully," bank spokesman Lawrence Grayson said on Monday, with regard to the SEC civil case.

Both recommendations are subject to review by U.S. District Judge Max Cogburn in Charlotte. District judges are not bound by magistrate judges' recommendations but often follow them.

Authorities accused Bank of America of misleading Wachovia Corp, now part of Wells Fargo & Co, and the Federal Home Loan Bank of San Francisco about risks in the $855 million offering, dating from early 2008 and backed by 1,191 "jumbo" adjustable rate mortgages that proved less safe than expected.

These loans had been made between July and November 2007, and had initial principal balances over $417,000, authorities said.

The Justice Department had sued under the Financial Institutions Reform, Recovery and Enforcement Act of 1989, which it has relied on in several recent financial crisis cases. Cayer said it failed to meet a requirement that any alleged false statements were "material" to a government regulator.   Continued...

A security guard patrols outside a Bank of America office in Burbank, California August 19, 2011. REUTERS/Fred Prouser