(Mike Mozart/Flickr)

Breaking new ground in financial crisis litigation, U.S. District Judge Jed Rakoff in Manhattan on Wednesday ordered Bank of America Corporation to pay $1.27 billion in a civil fraud case brought by the U.S. Department of Justice. The ruling follows a October 2013 jury verdict that BofA’s Countrywide Financial unit defrauded Fannie Mae and Freddie Mac into buying shoddy mortgages originated through an accelerated process known internally as High Speed Swim Lane (HSSL), or “Hustle.”

In a 19-page ruling, Rakoff concluded that the $1.27 billion fine is appropriate under the penalty provisions of the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), the civil statute the Justice Department charged Countrywide with violating. Rakoff also fined former top Countrywide employee Rebecca Mairone $1 million for her role in the HSSL scheme.

The U.S. attorney’s office in Manhattan initially sought an $864 million penalty, but then upped the damages estimate to $2.1 billion earlier this year. Prosecutors had urged Rakoff to fine Mairone $1.1 million. Bank of America’s lawyers at Williams & Connolly asserted that no penalty was warranted, arguing that any losses the government suffered from the mortgages at issue were caused by larger economic factors rather than Countrywide’s misstatements.

The Justice Department has been criticized for not bringing criminal cases against executives at Countrywide, a leading mortgage lender before the financial crisis. Prosecutors did, however, join a False Claims Act case brought by a Countrywide whistleblower. The government alleged violations of FIRREA, a statue enacted during the savings and loan crisis of the 1980s that imposes civil liability on financial institutions for certain criminal offenses like mail fraud and wire fraud. FIRREA has been a popular tool for prosecutors in recent years because it has a relatively low burden of proof and a generous statute of limitations.

Rakoff’s ruling is the first to address a bank’s liability for mortgage fraud under FIRREA. The judge wrote in Wednesday’s ruling that he faced no easy task, because the statute states that the fine can’t exceed either the gain to the bank or the loss to the government, but it “provides no guidance as to how to calculate such gain or loss or how to choose a penalty within the broad range permitted.”

Siding with the government, Rakoff ruled that gain and loss should be “viewed in terms of how much money the defendants induced the victims to pay to them.” He used a colorful analogy to illustrate his point: “If I sold you a cow for $100, saying it was a healthy dairy cow when I knew it had foot-and-mouth disease, you would in theory have a net loss of less than $100 since the cow would still be worth something as dead meat. But if you had known the truth … you would never have bought the cow in the first place, so your out-of-pocket loss of $100 is really more reflective of the misconduct perpetrated upon you.”

Rakoff ruled that the gain to BofA is almost $3 billion, but that he would lessen damages because about half of the home loans originated through HSSL performed as promised.

BofA’s legal team included Kenneth Smurzynski and Brendan Sullivan of Williams & Connolly. Marc Mukasey of Bracewell & Giuliani represents Mairone. Rakoff tossed Mukasey a compliment in Wednesday’s ruling, calling him “excellent counsel.”