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 civil suit Tuesday against the bank and several subsidiaries in federal court in Charlotte, N.C. The Securities and Exchange Commission filed a related suit against Bank of America there, too.
Bank of America disputed the allegations.
The suits accused the second-largest U.S. bank of misleading investors about the risks of the mortgages tied to the securities.
And authorities 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.
The government estimates 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's reckless and fraudulent ... practices in the lead-up to the financial crisis caused significant losses to investors," Anne Tompkins, the U.S. attorney for the Western District of North Carolina, said in a statement. "Now, Bank of America will have to face the consequences of its actions."
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. It marks the most high-profile suit 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 suit 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.
The actions against S&P and Bank of America followed years of criticism that the government had failed to do enough to hold accountable those companies that contributed to the crisis.
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.
Bank of America has been dogged by litigation largely as a result of those acquisitions. The bank has had to pay tens of billions of dollars to settle class-action lawsuits and previous actions brought by the SEC.
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