August 07, 2013
Observations About US v. BofA
Posted by David Zaring

The United States, per the USAO in Charlotte, sued BofA for false statements under FIRREA, the statute passed to rein in financial institutions after the S&L crisis.  The complaint is here, here's DealBook.  The SEC added its own civil suit alleging '33 act violations for missatements made to the investors who bought residential mortgage backed securities packaged by the bank.  And Matt Levine has an excellent wrap here; his takeaway is that there was a lot of disclosure in prosepctus, and not much evidence of actual fraud, though plenty of evidence of a lack of care that we really shouldn't like. Some additional observations.

  • Paragraphs 130 et seq. of the DOJ complaint document a failed effort to put bad mortgages into the RMBS.  Twice someone tried to do that, twice a BofA employee rejected the request.  But, DOJ says, that employee "did not have any such success (or opportunity) with respect to the bulk of the collateral pool, which was already formed prior to December 3, 2007."  That really doesn't sound like fraud.
  • Paragraph 122 puts this lawsuit in the same category as others by DOJ that object to the oversight being offered. "while the market was demanding more Loan Level Due Diligence on RMBS deals, BOA-Securities and BOA-Bank decided to conduct less Loan Level Due Diligence." Which is one of those "fair, but tough to make a jury care" kinds of arguments.
  • The misstatements were made in Jan/early Feb 2008.  Which is over five years ago - and most civil statutes of limitations expire in five years.  That may explain the resort to FIRREA, which has a ten year statute, because, it was decided, financial fraud cases take a long time to put together.
  • I'm kind of surprised no one from Main Justice was on the brief.  Clearly Washington was involved, via the SEC (though it looks like the Atlanta branch did the investigating), but this may mark the beginning of an enforcement effort realized through delegations to the various US Attorneys' offices.  There is some coordination; the SEC observed that the lawsuits "were coordinated by the federal-state RMBS Working Group that is focused on investigating fraud and abuse in the RMBS market that helped lead to the financial crisis."

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