US Court of Appeals overturns penalty against Bank of America in mortgage case

A federal appeals court ruled against the federal government's bid to hold Bank of America accountable for the sale of shoddy mortgages in the period leading to the financial crisis. The ruling overturns a $1.27-billion penalty the bank had been ordered to pay in the so-called hustle case.

A three-judge panel ruled yesterday that federal prosecutors had not been able to prove that Bank of America's Countrywide unit had defrauded Fannie Mae and Freddie Mac, the government-backed mortgage firms, when it sold them troubled loans.

According to the judges, while Countrywide employees might have sold loans in 2007 and 2008 that were not of the quality that was promised in the contracts with Fannie Mae and Freddie Mac, there was no evidence that these sales formed part of a deliberate deception. The loan programme at Countrywide was known informally as hustle.

''The trial evidence fails to demonstrate the contemporaneous fraudulent intent necessary to prove a scheme to defraud,'' judge Richard C Wesley wrote in a 31-page ruling.

The ruling by the United States Court of Appeals for the Second Circuit comes as one of the few setbacks to the justice department in its action against Wall Street following the mortgage crisis.

The civil fraud suit was among the many brought against banks by Manhattan US attorney Preet Bharara.

The court struck down a $1-million penalty against Rebecca Mairone, a former executive who oversaw the creation of hustle.

''This case was a massive government overreach from inception,'' Josh Rosenkranz, who represented Mairone in her appeal, said yesterday, Bloomberg reported. ''The government tried to take an allegation of a garden-variety breach of contract case and turn it into a fraud, with crushing and career-ending penalties.''

"Fraudulent intent must be found at the time of the allegedly fraudulent conduct," the appeals panel said.