BAC Bank of America Corporation

By Aruna Viswanatha 

WASHINGTON -- The Justice Department asked a federal appeals court to reconsider its ruling throwing out a civil mortgage-fraud case against Bank of America Corp., in an uphill effort to rescue one of its highest-profile cases tied to the financial crisis.

The U.S. attorney's office in Manhattan said in a Thursday filing the court had "overlooked a wealth of evidence" in reaching a May decision that found the government hadn't proven fraud by Bank of America's Countrywide unit over a program dubbed "Hustle."

The court said at the time the case amounted only to breaches of a contract, a stunning setback for the government's efforts to levy tough fines on corporations and executives. The court also threw out a related penalty against a Countrywide executive, one of the few individuals fined for alleged misdeeds during the crisis.

The Justice Department said the unanimous ruling by a three-judge panel at the Second U.S. Circuit Court of Appeals in New York had overlooked the terms of the contract that support its case. It asked the court to reconsider the case and send it back for another trial if it reached the same conclusion.

The government had initially faced a deadline last month to decide whether to appeal the case but had sought more time, saying the case was of "particular concern" for the Justice Department and that it needed input from other officials. Some agency officials privately expressed skepticism any appeal would be successful, since appellate panels rarely reconsider unanimous rulings, according to people familiar with the discussions.

The stakes in this case appear high for the government: The ruling potentially raises the bar for the government to prove fraud against companies and individuals, weakening a weapon the Justice Department has used to push Wall Street to agree to big mortgage settlements.

Legal experts have viewed the ruling as potentially affecting not just similar civil fraud cases, but also criminal fraud cases that involve contracts.

Current and former Justice Department officials have pointed to the appeals court ruling as an example of the difficulties in pursuing financial-fraud cases. The agency has faced criticism from lawmakers and others for bringing few prosecutions tied to the crisis.

A civil lawsuit filed in 2012 by the office of Manhattan U.S. Attorney Preet Bharara against Bank of America alleged that a 2007 program called "Hustle" -- created by Countrywide Financial Corp. before the giant mortgage lender was taken over by Bank of America -- had generated shoddy mortgages and then misrepresented those loans when selling them to Fannie Mae and Freddie Mac.

The housing-finance companies later had to be bailed out by the government during the financial crisis.

Bank of America declined to comment Thursday on the appeal.

A jury in 2013 found Bank of America and one of its executives, Rebecca Mairone, liable for fraud, and the judge later levied a $1.27 billion penalty against the bank and a $1 million penalty against Ms. Mairone, who now goes by Rebecca Steele.

The appeals court overturned the verdict and threw out the penalties against Bank of America and Ms. Steele.

"The Second Circuit got it right -- there was no fraud," Ms. Steele's lawyer, Marc Mukasey, said Thursday. "The government should move on and let Rebecca do so as well."

In an interview with The Wall Street Journal after the ruling, Ms. Steele said she felt unfairly singled out as the only executive sued in connection with the case. "That is something I think about a lot," she said. "Why me?"

The issue on appeal turned on a technical point: When, exactly, did Countrywide make any alleged misrepresentations about the mortgages it sold to the housing-finance companies? The appeals court ruled the only representations Countrywide made came in contracts entered into years before the allegedly shoddy loans were sold.

The government said the court overlooked terms in the contracts that provided that Countrywide continually made the representations about the loan, when it delivered the mortgage, not just at the time of contracting. The U.S. attorney's office also said the court overlooked other misleading statements the bank and Ms. Steele had made about the loans they were selling to the government-sponsored mortgage companies.

--Christina Rexrode contributed to this article.

Write to Aruna Viswanatha at Aruna.Viswanatha@wsj.com

(END) Dow Jones Newswires

August 04, 2016 19:07 ET (23:07 GMT)

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