Angelo Mozilo, better get ready to face prison.

[Tony Enriquez]

(Bloomberg) -- U.S. Attorney General Eric Holder, who forced Wall Street’s biggest banks to pay billions in fines for their roles in the subprime mortgage crisis, is pressing for action against executives at those firms, even as he prepares to leave his post.

Holder, who is stepping down as soon as his successor, Loretta Lynch, is confirmed, has asked U.S. attorneys involved in residential mortgage-backed securities cases to report in 90 days on whether they can develop cases against individuals, he said Tuesday at the National Press Club in Washington.

“That will be a report ultimately that will be given to Loretta to make determinations about whether further action is appropriate,” Holder said.

Holder has faced criticism from lawmakers who said the Justice Department failed to hold bank executives responsible for their roles in the worst financial crisis since the Great Depression. His department also was faulted for resolving cases against banks with settlements that let them escape criminal charges by paying fines, improving controls and promising not to break the law.

President Barack Obama set up the Residential Mortgage Backed Securities Working Group in 2012 to coordinate prosecutions of fraudulent underwriting activity by banks that contributed to the financial crisis by pooling and reselling residential mortgage-backed securities.

Wall Street’s biggest banks, including JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc., have paid nearly $37 billion to settle state and federal claims brought by the task force.

Civil Penalties

These cases were built on the 1989 Financial Institutions Reform, Recovery and Enforcement Act, a civil statue that allows the government to seek civil penalties for losses to federally-insured financial firms that occurred as long as a decade ago. Standard securities-fraud cases need to be brought within five years. FIRREA can be used against individuals as well as institutions and has less stringent liability requirements than criminal charges.

Bank of America, which acquired sub-prime lender Countrywide Financial Corp. in 2008, paid nearly $17 billion to settle claims against the bank and Countrywide in August.

In what could be the first major use of FIRREA against an individual over mortgage fraud, government attorneys are preparing a suit against Angelo Mozilo, Countrywide’s former chairman and chief executive officer, people familiar with the matter have told Bloomberg News. The effort follows the department’s decision to abandon a criminal probe of Mozilo.

Mozilo paid $67.5 million to the U.S. Securities and Exchange Commission in 2010 to resolve allegations he misled Countrywide investors. His lawyer has said there is no basis to pursue a further claim against him. 



 

[Tony Enriquez / UKIPA Holdings]

Fraud Verdict Against Countrywide & Bank of America Upheld

BofA’s “hustling” attempt to overturn a $1.27 billion judgment against it and Countrywide—along with the individual defendant identified in the next paragraph, the “Defendants”—in the U.S. District Court for the Southern District of New York for fraud in the sale of loans to Fannie Mae and Freddie Mac has proved unavailing.

Judge Jed Rakoff of the Southern District of New York recently rejected the Defendants’ motion for a judgment in their favor or in the alternative, for a new trial. The judge characterized the Defendants’ attempt to meet their burden as one that they “utterly failed” to meet and stated that the evidence of material misrepresentations supporting the verdict was “overwhelming.” Indeed, Judge Rakoff viewed the Defendants “continuing contention that there was insufficient evidence of a material misrepresentation to support the jury’s verdict” as one that “border[ed] on the frivolous.”

This lawsuit involved numerous accusations of fraud by the U.S. Department of Justice against Countrywide, which was acquired by Bank of America in 2008, and one of Countrywide’s officers, Rebecca Mairone, a creator of Countrywide’s “High Speed Swim Lane” program, also called HSSL or “Hustle,” which was the culprit for huge quantities of poor quality loans originated by Countrywide, and the focus of the lawsuit. That program emphasized speed of loan originations over quality and rewarded staff based on volume of loans. It reportedly removed the processes responsible for safeguarding loan quality and preventing fraud by eliminating underwriter review even from many high risk loans, assigning critical underwriting tasks to loan processors who were previously considered unqualified even to answer borrower questions. The program also eliminated previously mandated checklists that provided instructions on how to perform these underwriting tasks, and did away with the review of loans prior to sale to ensure that all conditions on the loan’s approval were satisfied prior to funding. Moreover, in furtherance of the program’s goal, compensation to those involved in the loan origination process was revamped to provide performance bonuses solely based on the volume of loans. Countrywide was also accused of concealing quality control reports on Hustle loans—reports that demonstrated high rates of fraud and other material defects plaguing the loans. Countrywide reportedly concealed this program from Fannie Mae and Freddie Mac when it sold the GSEs loans that it knew were not of investment quality.

In an attempt to overturn the verdict, the Defendants argued that the government’s evidence did not establish that the loans were of lower quality than the GSEs could have reasonably expected, and therefore that they made no misrepresentations that were material to the loan sales to the GSEs. However, Judge Rakoff disagreed, stating that


when the defendants sold Fannie and Freddie groups of loans represented to be of investment quality that in fact included a large number of non-investment quality loans, the defendants were making misrepresentations to Fannie and Freddie that were clearly material.”

Judge Rakoff also found that there was “ample evidence” that a substantial portion of the Hustle loans “were of far poorer quality than promised” and that the Defendants “knew as much.” The evidence demonstrated that Countrywide’s “quality assurance” reviews repeatedly found that large proportions of Hustle loans were “high risk” or “action required” and that Countrywide was well aware of the “high risk” rates for these loans, which rose over 80%.

Mairone argued that the government failed to introduce sufficient evidence that she knowingly participated in a scheme to defraud, and contended that she did not have the requisite fraudulent intent. But this argument was also rejected. The Court noted that Mairone ignored repeated warnings that stripping away quality controls would invariably impact loan quality. She ignored quality assurance reports showing that a whopping 80% of loans originated through the Hustle program were high risk. Mairone was also accused of taking steps to cover up this information. Judge Rakoff found that the evidence of Mairone’s fraudulent intent would, alone, support a finding of scienter or an intent to defraud, as to the other Defendants.

Judge Rakoff also observed that the “trial record was rife with evidence from which the jury could conclude that fellow executives Cliff Kitashima and Greg Lumsden also knowingly sold faulty loans to Fannie and Freddie.” According to the trial record, these executives sat on the Hustle steering committee that received the same quality assurance reports as Mairone. Among other things, they reportedly supported many of the procedures that were identified as “root causes” of the deterioration in loan quality of the Hustle loans. This evidence further supported the jury’s determination that the Defendants possessed the relevant fraudulent intent.

The court concluded that that there was “[n]o basis for this Court to conclude that the jury’s verdict was either the ‘result of sheer surmise and conjecture,’ or ‘a miscarriage of justice,’ and found that “the jury’s conclusion that this was a massive and intentional fraud was amply supported by the evidence.”