Bank of America Corp. ( BAC ) committed fraud when it sold loans to mortgage finance firms Fannie Mae ( FNMA ) and Freddie
Mac ( FMCC ) in a scheme called the hustle, a jury found Wednesday.
The decision marks the first time a bank has been found by a U.S. court to be responsible for wrongdoing tied to its
financial-crisis-era dealings, experts say.
The jury also found that Rebecca Mairone, a former Countrywide Financial Corp. executive, was liable for fraud for her
role in leading the "Hustle" loan-processing program. Bank of America, the second-largest U.S. bank by assets, bought
Countrywide in 2008.
"The jury's decision concerns a single Countrywide program that lasted several months and ended before BofA's
acquisition," said a spokesman for the Charlotte, N.C., bank. "We will evaluate our options for appeal."
The trial has taken jurors on a journey inside Countrywide's subprime lending unit, often seen as a central player in
the subprime-mortgage crisis that brought the housing market to its knees. And it has dragged Bank of America back into
the spotlight for Countrywide's alleged misdeeds during the housing boom.
The High Speed Swim Lane, or "Hustle," program was created in late 2007 as the market for those loans was crumbling.
The program's goal was to move into so-called prime loans, which carry the best interest rates and are made to borrowers
with high credit scores. But the government argued that by trying to speed up the production of those loans, executives
removed quality controls that led to bad loans being sold to Fannie and Freddie.
Civil penalties in the case will be determined by Manhattan District Judge Jed Rakoff at a later date.
The final tab will likely be relatively low for Bank of America, which has spent approximately $49 billion in legal
expenses tied to its acquisition of Countrywide. But the outcome could cause reputational harm to the bank, which has
worked for the last three years to put its legal troubles behind it.
The verdict marks a victory for the U.S. Attorney for the Southern District of New York, Preet Bharara, who is the
first federal prosecutor to win a case by using a federal statute created during the savings and loan crisis. The
Financial Institutions Reform, Recovery and Enforcement Act of 1989, or Firrea, extends the statute of limitations for
civil fraud to 10 years.
To sue under Firrea, the government had to establish that a federally insured financial institution was harmed by the
fraudulent conduct. The government argued that Bank of America, a federally insured financial institution, harmed itself
by exposing the bank to fallout from the conduct.
The government hasn't laid out a specific sum it is seeking but alleged Fannie and Freddie suffered net losses of $131
The jury's decision could pave the way for more lawsuits against banks. This week, The Wall Street Journal reported
that investors are seeking at least $5.75 billion from J.P. Morgan Chase & Co. (JPM) in a bid to recover losses from
mortgage-backed securities sold to them before the financial crisis, said people familiar with the talks.
George Zelcs, a partner with the law firm Korein Tillery, said Firrea gives "a broad range of targets, and couple that
with a longer statute of limitations, and you're going to be able to have more options on claims and who you can bring
William Black, a former federal regulator and professor at the University of Missouri-Kansas City law school, said
Firrea is a useful tool because limited government resources make it hard for prosecutors to complete investigations in
five years, the normal statute of limitations on fraud. "It's a good thing that the law exists and this shows you why
five years is an insufficient statute of limitations given the complexity in these cases," he said.
The trial, which took place as J.P. Morgan Chase neared a historic $13 billion settlement with the Justice Department
over mortgage-related abuses, brought back into the spotlight conduct of banks that many say contributed to the collapse
of the U.S. housing market and the broader financial crisis.
In the Bank of America case, the government argued that the hustle created bad loans by swapping out trained
underwriters for less qualified loan specialists, by cutting the time it took to approve a loan, and by removing
financial incentives to produce quality and instead instilling financial incentives that focused on speed.
"This was about speed and volume and not about quality," assistant U.S. attorney Jaimie Nawaday told the jury of six
women and four men in her closing arguments.
Brendan Sullivan, a partner at Williams & Connolly LLP and an attorney representing the bank, argued that the
government's logic in equating speed with fraud was faulty. "The government thinks speed wipes out quality," he told the
jury in his closing arguments. "The focus on speed is natural."
Mr. Sullivan argued that the bank's actions suggest that they had no intention to commit fraud. "You would not
normally announce a fraud at a 200-person meeting and play the hustle dance," he said, referring to a company gathering
announcing the new program.
The defense also attacked during trial Ed O'Donnell, the government's witness and whistle-blower. Mr. O'Donnell, who
served as head of underwriting at Countrywide, testified that he witnessed a degradation in the quality of hustle loans
and was ignored when he alerted Ms. Mairone.
Mr. O'Donnell declined to comment.
Mr. Sullivan called Mr. O'Donnell the "the million six man" because Mr. O'Donnell could reap as much as $1.6 million
if the jury finds the bank liable for fraud. He also showed the jury an email in which Mr. O'Donnell said, "Our exposure
is to manufacturing quality, not fraud or unethical stuff."
Ms. Mairone's attorney, Michael Hefter, a partner with the law firm Bracewell & Giuliani LLP, said there was no
evidence that Ms. Mairone didn't care about quality or instructed others to disregard quality. He also argued that Ms.
Mairone, who is now an executive at J.P. Morgan Chase, pushed a number of quality improvements during the "Hustle"
Marc Mukasey, an attorney for Ms. Mairone, said "We are not going to stop fighting for Rebecca. She is a woman of
integrity, ethics and honesty. She never engaged in any fraud because there was no fraud. We're going to fight on."
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