On Monday, a group of institutional investors sued Bank of America, Countrywide, their affiliates, and various former Countrywide executives including former CEO Angelo Mozillo, charging that Countrywide knowingly sold vast quantities of fraudulent mortgages in order to securitize them and sell them to unwitting investors. The plaintiffs, who include New York Life Insurance Company and TIAA/CREF, the teachers’ pension fund, allege violations of federal securities laws and common-law fraud. Bank of America (BAC) has not yet responded DailyFinance‘s request for comment, while the attorney for the plaintiffs had no comment.
The plaintiffs also accuse Countrywide of botching the securitization process by failing to deliver the notes and mortgages into the trusts that issued the securities. The complaint cites the now famous Kemp case, which included testimony by a Countrywide employee that the notes were not delivered or endorsed in compliance with the terms of the contracts. As a result of this allegation, discovery should include documents and depositions aimed at determining how accurate that employee’s statements were. Bank of America, not surprisingly, has been vigorous in its rejection of the employee’s statements.
Interestingly, the plaintiffs aren’t suing the ratings agencies. Although they assert that the AAA ratings the agencies placed on the securities were integral to the investors’ inaccurate assessment of their risk, and that the ratings were inflated by the securities issuers through “ratings shopping,” the plaintiffs have chosen to portray the agencies as fellow dupes of Countrywide. Many other securities fraud cases relating to mortgage-backed securities have included the ratings agencies in the cast of villains… er… defendants. Although the ratings agencies have been successful in getting all the federal securities claims dismissed so far, common-law fraud claims such as those being made in this case have been allowed to go forward.
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