Too-Big-to-Fail Bankers Have Not Been Charged Criminally for the Mortgage-backed Securities Collapse But Plenty of People Have Been Criminally Charged for Mortgage Fraud Perpetrated by the Bankers

As early as 2004, the FBI was warning of widespread mortgage fraud. CNN reported, “Rampant fraud in the mortgage industry has increased so sharply that the FBI warned Friday of an epidemic of financial crimes which, if not curtailed, could become the next S&L crisis.” Assistant FBI Director Chris Swecker said the booming mortgage market, fueled by low interest rates and soaring home values, has attracted unscrupulous professionals and criminal groups whose fraudulent activities could cause multibillion-dollar losses to financial institutions. “It has the potential to be an epidemic,” said Swecker, who heads the Criminal Division at FBI headquarters in Washington. “We think we can prevent a problem that could have as much impact as the S&L crisis,” he said.” (Click here for the complete 2004 story from CNN.)  The financial crisis caused by mortgage fraud was not even close to the size of the S&L crisis—it was at least 40 times bigger!!  Why didn’t the FBI stop it, and why are they not prosecuting the crime now? [Source]

Michael P. Stephens is the Federal Housing Finance Agency’s acting inspector general. Stephens leads the Office of Inspector General section of the Residential Mortgage-Backed Securities Working Group, whose other members include the Department of Justice and state attorneys general. The group coordinated a $13 billion settlement between JPMorgan Chase & Co. and the government in 2013, among other actions. His own agency is the watchdog for the overseer of taxpayer-backed Fannie Mae and Freddie Mac. Stephens said he’s “not a big fan” of the idea that banks shouldn’t be charged criminally because it could hurt their employees and shareholders.[Source]

U.S. accuses Bank of America of mortgage-backed securities fraud

August 6, 2013

Reuters - The U.S. government on Tuesday filed two civil lawsuits against Bank of America (NYS:BAC) that accuse the bank of investor fraud in its sale of $850 million of residential mortgage-backed securities.

The lawsuits are the latest legal headache for the second-largest U.S. bank, which has already agreed to pay in excess of $45 billion to settle disputes stemming from the 2008 financial crisis.

While most of the cases Bank of America has already confronted pertain to its acquisitions of brokerage Merrill Lynch and home lender Countrywide, the lawsuits filed on Tuesday pertain to mortgages the government said were originated, securitized and sold by Bank of America's legacy businesses.

The residential mortgage-backed securities at issue, known as RMBS, were of a higher credit quality than subprime mortgage bonds and date to about January 2008, the government said, months after many Wall Street banks first reported billions of dollars in write-downs on their holdings of subprime mortgage securities.

The Justice Department and the U.S. Securities and Exchange Commission filed parallel lawsuits in U.S. District Court in Charlotte, North Carolina, accusing Bank of America of making misleading statements and failing to disclose important facts about the pool of mortgages underlying a sale of securities to investors in early 2008.

The investors included the Federal Home Loan Bank of San Francisco and Wachovia Bank National Association, the Justice Department lawsuit said.

Bank of America, which is based in Charlotte, responded to the lawsuits with a statement:  

"These were prime mortgages sold to sophisticated investors who had ample access to the underlying data, and we will demonstrate that.

"The loans in this pool performed better than loans with similar characteristics originated and securitized 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."

Bank of America shares fell 1.1 percent to close at $14.64 on the New York Stock Exchange following news of the lawsuits, which were filed late in the afternoon.

Bank of America had warned in a securities filing on Thursday about possible new civil charges linked to a sale of one or two mortgage bonds.

According to the lawsuits, Bank of America made misleading statements and failed to disclose important facts about the mortgages underlying a securitization named BOAMS 2008-A. More than 40 percent of the 1,191 mortgages in the securitization did not comply with the bank's underwriting standards, according to the complaint.

"These misstatements and omissions concerned the quality and safety of the mortgages collateralizing the BOAMS 2008-A securitization, how it originated those mortgages and the likelihood that the 'prime' loans would perform as expected," the Justice Department said in its statement.

Threats of costly mortgage litigation have been dogging Bank of America for years.

"It has been shown repeatedly that the origination process at Bank of America and its subsidiaries failed to live up to their own internal guidelines and the resulting loans did not reflect the way they were characterized to investors," said Donald Hawthorne, a partner at Axinn Veltrop & Harkrider LLP, who has represented monoline insurers and RMBS investors in suits against mortgage originators, including Countrywide, relating to mortgage securities.

In 2011, the bank's shares fell more than 20 percent in a single day after American International Group (NYS:AIG) filed a $10 billion lawsuit accusing the bank of mortgage fraud.

Weeks later, Warren Buffett's Berkshire Hathaway Inc (NYS:BRK.A) swooped in with a $5 billion investment to shore up confidence in the bank. Since then, Bank of America's stock has more than doubled as the bank has announced agreements to settle major disputes, and investors have regained confidence in its outlook.

Among major deals, the company agreed to an $8.5 billion settlement with mortgage-backed securities investors, a $1.6 billion settlement with bond insurer MBIA Inc (NYS:MBI), and a settlement worth more than $10 billion with Fannie Mae (OBB:FNMA), the government-controlled mortgage finance provider.

The lawsuit signals the federal government's willingness to pursue litigation challenging banks securitizations and marketing practices even as the financial crisis recedes further into the past.

The Justice Department's lawsuit was brought under the Financial Institutions Reform, Recovery and Enforcement Act, a savings-and-loan-era law that federal prosecutors have revived in recent years to continue pursuing civil* fraud charges against financial institutions. It has a 10-year statute of limitations, double the deadline under other securities fraud laws. 

The U.S. attorney's office in Manhattan brought a separate suit against Bank of America under that act last October over losses that Fannie Mae and Freddie Mac suffered on loans the government said were deficient.

Attorney General Eric Holder said in a statement on Tuesday that President Barack Obama's Financial Fraud Enforcement Task Force, which brought the latest lawsuit against Bank of America, "will continue to take an aggressive approach to combating financial fraud and uncovering abuses in the residential mortgage-backed securities market," and is pursuing "a range of additional investigations."

Whether future investigations will succeed remains to be seen.

"Is this the first shot across the bow in terms of a larger campaign or is it trying to satisfy the press that the federal government is awake at their station but really only taking aim at a very small piece of a very big problem?" Hawthorne said.

Editor's Notes:
 
* Individuals committing mortgage fraud are subject to criminal charges yet banks are subject only to civil charges.

The Fraud Enforcement and Recovery Act of 2009 (FERA), which Obama signed into law on May 20, 2009, enables the Justice Department:

1. to prosecute mortgage fraud cases as bank fraud 
2. to seek enhanced penalties under the mail and wire fraud statutes
3. extends the statute of limitations on mortgage fraud from 5 years to 10 years 
4. extends the prison sentence and increases the maximum fine

By amending the definition of “financial institution” to include a “mortgage lending business,” FERA gives the Justice Department the capability to prosecute mortgage fraud cases as bank fraud and to seek enhanced penalties under the mail and wire fraud statutes. As a result, convictions for mortgage fraud can now carry a 30-year maximum prison sentence or a maximum $1 million fine, or both. Even more importantly, mortgage fraud cases will now have a 10-year statute of limitations, as opposed to the 5-year statute of limitations for other frauds, which will give federal prosecutors much more time to develop such cases.

There is a 10-year statute of limitations on mortgage fraud cases committed by individuals. In comparison, there is only a 5-year statute of limitations for securities fraud committed by Wall Street.

In February 2013, regulators for the Securities and Exchange Commission argued before the U.S. Supreme Court that the five-year clock should begin when investigators first detect the crime, rather than when the alleged fraud occurred. On February 27, 2013, the U.S. Supreme Court ruled in favor of Wall Street and limited the authority of the SEC to seek civil penalties to five years from the time a securities fraud took place:

The nine-member court ruled by a unanimous vote that the five-year clock for the government to act on securities fraud begins to tick when the fraud occurs, not when it is discovered. Wednesday’s decision is a defeat for securities regulators, who would have benefited from a favorable ruling because it could have bought them more time to bring complex cases, including cases springing from the 2007-2009 financial crisis.

Banks Can Scam Individuals and Face No Criminal Prosecution But Individuals Who Scam Banks Face Up to 30 Years in Prison - U.S. Seeks New Tactic to Criminally Charge Wall Street Bankers

July 17, 2013

U.S. federal prosecutors are considering a new strategy for criminally charging Wall Street bankers who packaged and sold bad mortgage loans at the height of the housing bubble, according to a federal official familiar with the investigation.

WallStreetPit - The official said federal authorities are finding new evidence they say indicates intent to commit fraud over the packaging and sale of mortgage bonds backed by subprime home loans in some of the civil lawsuits plaintiffs’ lawyers have filed against large banks.

And they are exploring whether they can build criminal cases against bankers by using a 1984 law intended to punish individuals for scamming commercial banks.

The investigators are part of the Justice Department’s Residential Mortgage-Backed Securities Working Group, a network of law enforcement agents and prosecutors – both state and federal – working together to probe the mortgage market meltdown that helped trigger the financial crisis.

“The RMBS Working Group members are aggressively investigating both civil and criminal matters across the country. RMBS Working Group members expect to announce more law enforcement actions in the future,” said Adora Jenkins, a spokeswoman for the Justice Department.

The group keeps a close eye on every civil suit filed and holds regular conference calls to update its members on developments. It held a day-long meeting on Friday to discuss ongoing investigations and potential new targets, as well as legal strategies, according to the Justice Department.

The strategy involves a shift away from the more widely used securities fraud charge to a less common offense: bank fraud. The advantage is that perpetrators of bank fraud can be charged up to 10 years after their crimes, compared with the five-year statute of limitations on securities fraud, which has already run out on most events leading up to the 2008 financial crisis. A bank fraud conviction carries up to $1 million in fines and a maximum prison sentence of 30 years.

Rita Glavin, a partner at Seward & Kissel in New York who specializes in white-collar, criminal defense, said she thought the statute’s broad scope gave prosecutors an opportunity to use it, and adding a conspiracy charge could help.

“When you charge conspiracies or schemes to defraud it gives you a lot of leeway in terms of the types of evidence you’re allowed to get in, because it speaks to the defendant’s state of mind,” she said.

Some legal critics express misgivings. They say it has the whiff of a face-saving measure by the U.S. government in light of criticisms about prosecutors’ inability to bring criminal cases over the financial crisis.

The bank fraud statute is more often used to pursue people trying to forge checks, falsify loan documents or make other false statements to banks. Applying the charge to behavior in the securities market would be a novel use of the statute.

“You’re taking a statute that predates the entire phenomenon of securitization and trying to apply it to the securities market,” said V. Gerard Comizio, a Washington-based partner at Paul Hastings, a law firm.

“I don’t think any prosecutor wants to start his or her day dealing with a statute that it’s not clear they have jurisdiction to apply,” added Comizio, who previously served as an attorney for the U.S. Securities and Exchange Commission, and deputy general counsel of the Office of Thrift Supervision.

But using the bank fraud statute could inject new life into the U.S. government’s effort to hold accountable the people on Wall Street whose overzealous approach to mortgage lending and securitization is what many economists say resulted in the crippling wave of home foreclosures, the financial crisis and the resulting deep recession.

Only one person faces jail time for activities related to mortgage-backed securities: former Credit Suisse Group AG (CSGN.VX) managing director, Kareem Serageldin, who allowed traders working for him to artificially inflate the values of mortgage-backed securities they were holding in 2007. He pleaded guilty to a conspiracy charge in April and faces up to five years in prison. His sentencing is scheduled for August.

His case, however, isn’t like the ones the RMBS group is investigating now because he and his subordinates tried to defraud their own institution, not an outside entity.

SECOND WIND

Federal prosecutors had previously ruled out criminal charges in many investigations into the causes of the financial crisis.

As part of the attempt to breathe new life into criminal cases, Federal Bureau of Investigation agents are monitoring civil fraud suits against major banks like JPMorgan Chase & Co (JPM.N) and Bank of America Corp (BAC.N), which acquired two of the largest players in the mortgage securitization world – Bear Stearns and Countrywide Financial – in 2008, according to two government sources.

FBI spokesman James Margolin said the bureau sometimes has to rely on civil court cases to turn up evidence of criminal behavior. Amy Bonitatibus, a spokeswoman for JPMorgan, and Lawrence Grayson, a spokesman for Bank of America, both declined to comment.

Civil cases can involve detailed document discovery processes and interviews that law enforcement agents may not have the time or the resources to do, Columbia University School of Law Professor Daniel Richman said.

According to legal experts who have been monitoring the fallout from the mortgage crisis, at the greatest risk of being charged are former mid-level investment bank employees who, during the peak years of mortgage bond issuance in 2005-2007, stitched together hundreds of thousands of doomed home loans into packages and sold them as highly rated securities.

To prove any banker committed bank fraud, the government would have to show that those packaging and selling the securities deliberately lied about their quality, and that they targeted commercial banks in sales pitches.

“Prosecutors would be looking at the offering memos, prospectuses and so on to see if there were any misrepresentations in them to the banks that purchased them,” said David Rosenfield, counsel at Herrick Feinstein specializing in white collar criminal defense. He has no specific connection to the MBS lawsuits.

Related:

Fraud and folly: The untold story of General Electric’s subprime debacle
Five years after the financial collapse and no Wall Street executive has been criminally charged
Obama administration’s phony crackdown on the banks