The US government has accused Bank of America Corp of civil fraud, saying the company failed to disclose risks and misled investors in its sale of US$850 million of mortgage bonds during 2008.
The US Department of Justice filed a lawsuit on Tuesday against the bank and several subsidiaries in federal court in Charlotte, North Carolina, where Bank of America is based. The US Securities and Exchange Commission (SEC) also filed a related lawsuit against the bank there.
Bank of America disputed the allegations.
The lawsuits accuse the US’ second-largest bank of misleading investors about the risks of the mortgages tied to the securities.
The government also said the bank failed to tell investors that more than 70 percent of the mortgages backing the investment were written by mortgage brokers outside the banks’ network. That made the mortgages more vulnerable to default, they said.
The bank disclosed the percentage of such mortgage loans in the investment only to a select group of investors, the suits alleged.
Bank of America could face monetary penalties. The government did not specify how much it is seeking, but it estimated that investors lost more than US$100 million on the deal.
Bank of America’s CEO at the time described those mortgages as “toxic waste,” the SEC said.
“Bank of America’s reckless and fraudulent ... practices in the lead-up to the financial crisis caused significant losses to investors,” US attorney for the Western District of North Carolina Anne Tompkins said in a statement. “Now, Bank of America will have to face the consequences of its actions.”
Bank of America said it would refute the government’s allegations in court.
“These were prime mortgages sold to sophisticated investors who had ample access to the underlying data and we will demonstrate that,” company spokesman Lawrence Grayson said in a statement. “The loans in this pool performed better than loans with similar characteristics (made and packaged into securities) at the same time by other financial institutions.”
“We are not responsible for the housing market collapse that caused mortgage loans to default at unprecedented rates and these securities to lose value as a result,” Grayson added.
The action was brought by a financial-fraud enforcement task force set up to pursue cases related to the 2008 financial crisis. The justice department lawsuit marks the most high-profile action brought by US President Barack Obama’s administration over conduct related to the financial crisis since the department sued credit rating agency Standard & Poor’s (S&P) in February. That lawsuit alleged that S&P knowingly inflated its ratings of risky mortgage investments ahead of the crisis.
S&P, a unit of McGraw-Hill Cos, has rejected the allegations.