A federal judge ruled on Wednesday that the United States can pursue parts of a civil lawsuit against Bank of America Corp (NYSE:BAC) over its sale of toxic mortgages to Fannie Mae and Freddie Mac, boosting a largely untested legal theory the government used in the case.
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Bank of America had sought to dismiss the lawsuit, which seeks penalties under two laws. One is the False Claims Act, which is often used to target fraud against the government, and the other is the 1989 FIRREA law.
FIRREA does not yet have much of a track record in court, but the government turned to in the wake of the financial crisis as a potential means to target civil fraud involving financial institutions.
U.S. District Judge Jed Rakoff issued a two-page ruling that dismissed the claims in the lawsuit seeking penalties under the False Claims Act, but allowed the claims that seek penalties under FIRREA to advance. Rakoff, in New York, said he will explain the reasons for his decision at a later date.
The ruling comes as something of a surprise, since Rakoff at a hearing last month appeared skeptical of how the Justice Department had used FIRREA in its case.
The lawsuit, which blames Bank of America for more than $1 billion in losses incurred by the government-controlled mortgage finance companies, accuses the bank of engaging in a scheme to defraud them through a program started at the former Countrywide Financial Corp, which the bank acquired in 2008.
FIRREA, or the Financial Institutions Reform, Recovery, and Enforcement Act, allows the government to seek civil penalties against anyone who commits a fraud "affecting a federally insured financial institution."
But in a trio of cases, banks including Bank of America, Bank of New York Mellon Corp (NYSE:BKN) and Wells Fargo & Co (NYSE:WFC) have argued that the law cannot apply when the only financial institution affected by a fraud was the institution that allegedly committed the fraud.
Another federal judge in New York rejected that argument last month in a case against Bank of New York Mellon, and allowed accusations that the bank overcharged clients for trading currencies to move forward.
A Justice Department spokeswoman declined to comment on the Wednesday ruling. A representative for Bank of America did not immediately respond to a request for comment..