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 At a hearing on Thursday, U.S. District Judge Jed Rakoff in
Manhattan asked the bank and the Justice Department to brief him on
the alternative, which is based on the grains rather than the losses
resulting from the sales.
The hearing followed a jury verdict on October 23 in which a federal
jury found Bank of America liable for fraud for selling substandard
mortgage to government sponsored mortgage finance companies Fannie
Mae and Freddie Mac.
The verdict was a big win for the government in its efforts to hold
Wall Street accountable for the financial crisis, and the Justice
Department has requested a penalty based on the gross losses Fannie
Mae and Freddie Mac incurred.
But at Thursday's hearing Rakoff said he wanted a "more full
presentation" on how to calculate the penalty based instead on how
much Countrywide gained through the fraud, calling it a simpler
approach.
The judge said that his comments should not signal how he will
ultimately rule. Rakoff said he would issue a decision sometime in
February.
A penalty based on gains rather than losses would likely be
significantly smaller than prosecutors in U.S. Attorney Preet
Bharara's office have requested.
Evidence the government presented at trial indicated that
Countrywide made $165.2 million selling the loans.
The case, launched in October 2012, focused on a mortgage lending
process at Countrywide called the "High Speed Swim Lane," or
alternatively "HSSL" or "Hustle," that the government said
emphasized speed and quantity over quality.
The Department of Justice wants Bank of America to pay $863.6
million based on the gross loss incurred on the HSSL loans by Fannie
and Freddie, which the government took into conservatorship in 2008.
The Justice Department has also asked that Rakoff require that
former Countrywide executive Rebecca Mairone, who was also found
liable by the jury, pay $1.1 million.
"We're here to assess civil penalties, the purpose of which is to
deter and punish," Jaimie Nawaday, a lawyer at the Justice
Department, said in court on Thursday.
She urged the judge to award a penalty based on the losses through a
"broad interpretation" of the Financial Institutions Reform,
Recovery, and Enforcement Act, a law passed after the 1980s
savings-and-loan scandals.
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The law, which carries a lower burden of proof than criminal cases
and a 10-year statute of limitations, has become central in a wave
of Justice Department investigations focused on the financial
crisis.
But Rakoff prodded Nawaday on why assessing a penalty based on
Countrywide's gain rather than loss is not "a more natural way" to
look at the case.
"The point of a fraud is to get money you're not entitled to," he
said.
Kenneth Smurzynski, a lawyer for the bank at Williams & Connolly,
urged the judge to find that the maximum penalty allowed under the
statute was $1.1 million, and asked Rakoff to use his discretion to
award nothing.
He also criticized the government's calculation of Fannie and
Freddie's loss, saying it ignored that they continued to receive
value from the mortgages.
"What the government calls gross loss is simply preposterous,"
Smurzynski said.
But Rakoff questioned how Bank of America could be right that under
the law the maximum penalty could just be $1.1 million, saying a
finding like that would provide a "windfall" in a massive fraud
case.
"That wouldn't serve any deterrent value at all," Rakoff said.
Michael Mukasey, a lawyer for Mairone at Bracewell & Giuliani, urged
the judge to be lenient with his client, saying she had been
"punished enough already" through enduring publicity connected to
the case.
He urged that no penalty be awarded against Mairone, 46, saying he
did not expect the bank to indemnify her for any award.
"Just because someone committed an act that in the eyes of the jury
and maybe the court is a legal violation, it doesn't mean you're a
bad person," he said.
The case is U.S. ex rel O'Donnell v. Bank of America Corp et al,
U.S. District Court, Southern District of New York, No. 12-01422.
[By Nate Raymond © 2013 Thomson Reuters. All
rights reserved.]
(Reporting by Nate Raymond in New York. editing by Andre Grenon) Copyright 2013 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |
