The U.S. Second Circuit Court of Appeals has overturned a $1.27 billion penalty imposed on Bank of America over the alleged misrepresentation of mortgage-backed securities sold by Countrywide Financial Corp. to the GSEs through a program known as the High Speed Swim Lane (HSSL, commonly known as “Hustle”).
The appellate court overturned the verdict because the proof was insufficient under federal fraud statutes to hold the bank liable in connection with Countrywide's Hustle program.
The court's ruling stated that the government “needed to show false or misleading statements made with fraudulent intent,” but instead, “Critically, the government presented no proof at trial that any quality guarantee was made with fraudulent intent at the time of contract execution. Nor did it offer evidence of any other representations, suggestions, or promises—separate from and post-dating execution of the initial contracts—that were made with fraudulent intent to induce the GSEs to purchase loans.”
Bank of America spokesman Lawrence Grayson said of the reversal of the penalty, “We are pleased with the appellate court’s decision.” A spokesman for Manhattan U.S. Attorney Preet Bharara, who brought the case to trial, said he had no immediate comment when contacted by DS News.
The U.S. Department of Justice sued Bank of America in August 2013 over Hustle, alleging that the program emphasized speed over quality of the loans sold, and staff members were rewarded according to sales volume. The government's lawsuit against Bank of America was a whistleblower suit originated from former Countrywide executive Edward O'Donnell, who reportedly collected $57 million for filing the whistleblower suit.
In October 2013, a jury found Countrywide liable for selling toxic MBS to Fannie Mae and Freddie Mac under the Hustle program. Bank of America was ordered to pay a $1.27 billion civil penalty by Judge Jed Rakoff of the U.S. District Court of the Southern District of New York in July 2014 as a result of the bank's alleged role in selling toxic mortgage-backed securities to the GSEs.
Since Rakoff issued the penalty, Bank of America has fought to have the verdict and the penalty dismissed, claiming not only that the Hustle program ended prior the bank's 2008 acquisition of Countrywide, but that the government's accusations in the case amount only to breach of contract and not fraud.
In February 2015, Rakoff denied the bank's request to overturn the verdict and the request for a new trial. In April 2015, Bank of America asked court to either reverse the judgment in the Hustle case or vacate the judgment and remand the case, claiming that Rakoff made partial public statements while the case was still pending and also that “the trial itself was riddled with errors at both the liability and penalty phases.”
A $1 million fine against former Countrywide executive Rebecca Mairone—so far the only individual penalized by the government for an alleged role in the financial crisis—was also overturned along with the $1.27 billion penalty against the bank.
“I think it was a fair decision, and it was a long time coming,” Mairone told DS News. “I'm relieved to finally be vindicated from the whole fraud issue. I couldn't be happier. It took a long time to get to this point, but you have to keep fighting for the right thing.”
Click here to read the court's complete ruling.