SEC Charges Bank of America with Fraud in Connection with Offering of Mortgage-Backed Securities

SEC v. Bank of America et al., Case No. 3:13-cv-447 AVC (W.D.N.C.).  On August 6, 2013, the SEC announced fraud charges against Bank of America and two subsidiaries related to an offering of residential mortgage-backed securities (“RMBS”).  According to the SEC, Bank of America together with Banc of America Securities LLC (now Merrill Lynch, Pierce, Fenner & Smith) and Bank of America Mortgage Securities (“BOAMS”) conducted the $855 million RMBS offering in 2008.  The offering was marketed as appropriate for conservative RMBS investors.  The SEC alleges that Bank of America misled investors about the risks and the underwriting quality of the mortgages by claiming that the mortgage loans backing the offering were underwritten in conformity with the bank’s own guidelines.  In reality, however, the mortgage loans had ineligible appraisals, unsupported statements of income, and misstatements about owner occupancy.  There was also evidence of mortgage fraud in some instances.  The SEC also alleges that the ratios of debt-to-income and original-combined-loan-to-value were routinely miscalculated, and then the inaccurate ratios were provided to the investing public.  The offering suffered an 8.05 percent cumulative net loss rate through June 2013 resulting in losses of almost $70 million and anticipated future losses of another $50 million.  The SEC charged defendants with violations of Sections 5(b)(1), 17(a)(2) and 17(a)(3) of the Securities Act of 1933.  The SEC seeks injunctive relief, disgorgement and civil monetary penalties.

In addition, the Department of Justice announced a parallel civil action against Bank of America for violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989.

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