Appellate Court Strikes Down Only Obama DOJ Victory Against Big Banks

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* The following is an opinion column by R Muse *

In its simplest meaning, fraud is considered wrongful or criminal deception intended to result in financial or personal gain. Any normal person would consider deliberately breaking (breaching) a contract intended to result in personal and financial gain is fraud as well, but a three-panel appellate court is not packed with “normal people” – at least not when the court rules on a case involving Bank of America.

Bank of America got some very good news on Monday when the Court of Appeals for the 2nd Circuit struck down a lower court ruling and said the banking giant does not have to pay a $1.3 billion penalty assessed about six years ago. The penalty was a result of a jury trial where the jurors “found the megabank guilty of fraud in 2013.”

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The case against Countrywide was one of, if not the only, case concerning the mortgage crisis that the Justice Department decided to pursue instead of reaching settlements with the government the banking industry will never pay. Bank of America’s subsidiary, Countrywide was knowingly selling bad mortgages to Fannie Mae and Freddie Mac and because the two firms are closely affiliated with government, taxpayers were forced to fund the bailout.

As a brief reminder of why Bank of America was found guilty of fraud by a jury; Countrywide employees devised a mortgage-scam program they aptly named “Hustle.” Its purpose was closely related to its name because Countrywide “knowingly sold bad mortgages to Fannie Mae and Freddie Mac;” it’s why a jury found Countrywide guilty in 2013.  Countrywide staffers were guilty of “packaging up low-quality mortgage securities” mixed in with some better quality mortgage securities and “sold them to government-backed housing finance companies” that had to be  bailed out by taxpayers when the industry came crashing down.

After the 2013 jury’s guilty verdict, a federal judge decided that Bank of America had to pay a significant fine of $1.27 billion; that amount was more than prosecutors were ever expected to ask for. The judge’s hefty fine was “to make the government whole and dissuade the bank from cheating the taxpayers again.” However, Bank of America had a different idea and came up with a devious scam to avoid the fine the banking giant had no intention of paying.

Bank of America appealed the judgment and claimed that its subsidiary did not commit fraud in selling worthless mortgages to government-backed agencies; it was only guilty of committing breach of contract and it is different than committing “outright fraud.”

Unbelievably, the three-judge panel accepted Bank of America’s claim and the financial giant is off the hook for the nearly $1.3 billion penalty imposed three years ago. The Appeals Court came up with an odd idea to support its ruling that although Countrywide (Bank of America) did “willfully and intentionally breach its contract,” it is not fraud. According to a brief explanation of the ruling by the appeals court:

In sum, a contractual promise can only support a claim for fraud upon proof of fraudulent intent not to perform the promise at the time of contract execution. Absent such proof, a subsequent breach of that promise — even where willful and intentional — cannot in itself transform the promise into a fraud.“

According to the court it is a simple case of “breach of contract” because that’s what Bank of America said it was.  The court ruled that to prove actual fraud, the government had to show the bank’s executives knew when they negotiated contracts with the government that they had no intent and were never going to adhere to the terms.

What that means in plain language is that although Countrywide did willfully and intentionally commit fraud shortly after the contract had been executed, it cannot legally be fraud because there was no fraudulent intent at the time the contract went into effect; at least no intent the government could prove.

It is meaningless that the bank began committing fraud after the contract was in operation according to the appellate court. It is difficult to comprehend exactly how criminal deception intended to result in financial gain after a contract is in place (executed) is only a breach of contract, but for a comprehensive explanation about how and on what grounds the three-judge panel “fell for” Bank of America’s argument, Bloomberg’s Matt Levine has a nifty, and ire-inspiring, piece here.

Although Bank of America escaped paying $1.27 billion in fines, there was some good that came out of the government prosecuting and winning a guilty verdict in the only jury trial involving the “big banks” responsible for the mortgage crisis. No small number of financial observers have credited “the ‘Countrywide Hustle’ case and verdict” for the government’s ability to win a “series of high-profile settlements with megabanks” over their participation in mortgage crisis actions. In fact, after the jury reached a guilty verdict against Countrywide, the Wall Street Journal called it “a weapon the Justice Department has used to push Wall Street to agree to those deals.”

As noted by Think Progress, it is true that the banks “got off easy” by just settling with the Justice Department instead of being found guilty in a jury trial, but “the settlements nonetheless stand as the most significant form of accountability the government was able to win over rampant bank misconduct in the mortgage-backed securities markets prior to the crisis.”

It is beyond refute that the Countrywide “Hustle” Bank of America inherited epitomized those “rampant bank abuses,” but the Hustle guilty verdict certainly had the effect of frightening and sending other banks to the settlement table to avoid being found guilty by a jury. That effect is most likely non-existent after the appeals court weighed in on Bank of America’s side.

It is unfortunate that the 2nd Court of Appeals rescinded the Hustle guilty verdict and allowed Bank of America to avoid paying a penalty. Because now the banks have all the momentum and it diminishes the odds of ending the “too big to jail mindset among regulators and prosecutors” who were emboldened by the 2013 jury’s guilty verdict.

Now, even while the government is attempting to “cut deals” with other suspect banks and lending institutions, the Department Of Justice’s task just got a lot more difficult because three appellate judges ruled that committing fraud is dependent on when a contract was signed and executed; at least those are the rules for big banks that are too big for a district judge to even levy a fine against.