US gov't accuses Bank of America of civil fraud in sale of $850M of mortgage bonds in 2008

WASHINGTON — The U.S. government has accused Bank of America Corp. of civil fraud, saying the company failed to disclose risks and misled investors in its sale of $850 million of mortgage bonds during 2008.

The Justice Department filed a lawsuit Tuesday against the bank and several subsidiaries in federal court in Charlotte, N.C., where Bank of America is based. The Securities and Exchange Commission filed a related lawsuit against Bank of America there, too.

Bank of America disputed the allegations.

The lawsuits accuse the second-largest U.S. bank of misleading investors about the risks of the mortgages tied to the securities.

And the government 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 didn't specify how much it is seeking, but it estimated that investors lost more than $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 said it will 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 the Obama administration over conduct related to the financial crisis since the department sued credit rating agency Standard & Poor's 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.

When the real estate bubble burst in 2007, home values plunged and millions of people defaulted on their mortgages and lost their homes. Investors who bought securities backed by high-risk mortgages lost billions. Regulators have said that inaccurate statements by banks in packaging and selling mortgage bonds contributed to the investors' losses.

The lawsuit "marks the latest step forward in the Justice Department's ongoing efforts to hold accountable those who engage in fraudulent or irresponsible conduct," Attorney General Eric Holder said.

Bank of America received $45 billion in federal bailout aid during the crisis. It became one of the biggest players in the mortgage market through its acquisitions of Merrill Lynch and Countrywide Financial, which wrote many high-risk mortgages that contributed to the crisis.