Southern District Judge Jed Rakoff has ordered the Bank of America to pay $1.27 billion in penalties in connection with a wide-ranging mortgage fraud perpetrated by its Countrywide financial unit, and slapped a $1 million personal judgment on a former Countywide executive.
Rakoff’s decision, released Wednesday, followed a trial last fall in which jurors found that Countrywide and Rebecca Mairone, the only individual charged in the case, defrauded the government-sponsored Freddie Mac and Fannie Mae programs by peddling at break-neck speed what they knew were substandard loans during the recession of 2007 and 2008.
The case was initially rooted in a Securities and Exchange Commission action against three top Countrywide executives who were accused of falsely assuring investors that the company was a prime mortgage lender when in fact it was deeply involved in high risk loans. That case was settled and no criminal charges were lodged.
The matter before Rakoff, United States of America v. Countrywide Home Loans, 12-cv-1422, was initiated after a whistleblower, Edward O’Donnell, came forward in 2012 with a qui tam action alleging that Countrywide was involved in a so-called “High Speed Swim Lane” (also known as “HSSL” and “Hustle”) scam in 2007 and 2008.
The Southern District U.S. Attorney’s Office took over the matter and persuaded a jury that Countrywide and Mairone “had engaged in an intentional scheme to misrepresent the quality of the mortgage loans that it processed through the HSSL program and sold to Fannie Mae and Freddie Mac,” according to Rakoff’s decision.
A jury found Countrywide and its successor in interest, the Bank of America, civilly liable under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), a vehicle through which courts can impose significant financial penalties for criminal acts that impact federally insured banking institutions. Under FIRREA, the government sought penalties of $2.1 billion against the company and $1.2 million against Mairone.
Rakoff said while the HSSL process lasted for only nine months, it was “from start to finish the vehicle for a brazen fraud by the defendants, driven by a hunger for profits and oblivious to the harms thereby visited, not just on the immediate victims but also on the financial system as a whole.”
Much of his 19-page decision dealt with the calculation of penalties, a process for which the statute “provides no guidance” except that the penalty cannot not exceed the amount of the fraudulent gain or loss, the court said.
Rakoff said the record suggests that there were 17,611 HSSL-generated loans, and that Freddie Mac and Fannie Mae paid Countrywide $2.96 billion for the instruments.
“[T]he civil penalty provisions of the FIRREA are designed to serve punitive and deterrent purposes and should be construed in accordance with those purposes,” Rakoff wrote. “This strongly cuts in favor of the government’s position that both gain and loss should be viewed simply in terms of how much money the defendants fraudulently induced the victims to pay them.”
Rakoff said in a footnote that “it bears mentioning that, by virtue of this fraud, the bank defendants managed to unload a vast portfolio of risky assets on unwitting buyers and were thereby able to reduce the risk on their own balance sheet at a crucial moment in time.”
However, Rakoff said “while Fannie Mae and Freddie Mac would never have purchased any loans … if they had know that Countrywide had intentionally lied to them about the loans’ quality,” the government’s own expert concluded that about 57 percent of the loans were not materially defective. Consequently, the imposed corporate penalty of $1.27 billion reflects about 43 percent of the total amount Freddie Mac and Fannie Mae paid for the loans.
With regard to Mairone, Rakoff found her trial testimony “implausible,” and drew a negative inference from her lack of candor.
“There was convincing evidence that Ms. Mairone—the relatively new employee who had to prove herself—most aggressively pushed forward the HSSL fraud and most scathingly denounced those who raised concerns,” Rakoff said, adding that when O’Donnell raised concerns, she gave him the “back of her hand.”
Still, he said that while Mairone is “certainly not a candidate for welfare” and is likely to remain in lucrative positions, the $1.2 million penalty sought by the government would “strain her resources to the limit.”
Rakoff ordered Mairone to pay a total of $1 million in a series of quarterly payments representing at least 20 percent of her gross income until the penalty is paid off.
A team of prosecutors from the Southern District represented the government. Attorneys from Goodwin Procter in Washington, Boston and Manhattan represented Countrywide.
Bank of America was represented by attorneys from Williams & Connolly in Washington. Representing O’Donnell was David Gerard Wasinger of the Wasinger Law Group in St. Louis, Mo.
Bank of America said yesterday that it was considering its options.
“This figure simply bears no relation to a limited Countrywide program that lasted several months and ended before Bank of America’s acquisition of the company,” Lawrence Grayson, a spokesman for bank, said in an interview with Bloomberg.
Southern District U.S. Attorney Preet Bharara noted in a statement said the bank first had claimed that the government had no case and then, after the jury verdict, “claimed that it should pay no penalty at all, arguing that the victims were not harmed and that the bank did not profit from this massive fraud.”
“Judge Rakoff’s opinion squarely and emphatically rejects the bank’s claims which, besides ignoring the victims’ out-of-pocket losses, also ignored that the fraudulent conduct required penalties to be paid for punitive and deterrence purposes as well,” Bharara said.