07/11/2012 - U.S. District Judge William H. Pauley, III, denied Bank of America Corporation’s motion to dismiss the claims in Pennsylvania Public School Employees’ Retirement System v. Bank of America Corporation that it had violated section 10(b) of the Securities Exchange Act of 1934. The court held that the consolidated complaint filed by the lead plaintiff, BR&B client Pennsylvania Public School Employees’ Retirement System, properly alleges that Bank of America purposefully concealed its reliance on Mortgage Electronic Registration Systems, Inc. (“MERS”) and its exposure to billions of dollars of loan repurchase claims arising from the sale of mortgage-backed securities. MERS is a private computerized system for processing and tracking loans that claimed to eliminate the need to physically record the transfer of mortgages.
The consolidated complaint alleges that Bank of America, the largest lender in the United States (and, following its acquisition of Countrywide Financial Corporation in July 2008, one of the biggest originators of subprime mortgages), used MERS to avoid recording requirements and facilitate the speedy conversion and sale of mortgages through their securitization in the secondary market. The complaint also alleges that Bank of America had engaged in various forms of misconduct, including “robo-signing” of false affidavits, in attempts to foreclose on various loans. The complaint alleges that Bank of America failed to disclose its reliance on MERS and the looming obstacles it faced as a result. The district court held sufficient the complaint's allegations that Bank of America had a duty to disclose its reliance on MERS and its associated risks, and that defendants’ failure to disclose “that MERS ‘clouded’ ownership for a substantial number of [the company’s] loan assets” constituted a material omission.
The court also concluded that the complaint properly alleges that Bank of America had assumed liability for representations and warranties Countrywide made in connection with its subprime mortgage business. The court found that the company’s statements that it had “resolved issues with toxic Countrywide assets by writing down the value of loan portfolios…were misleading because [Bank of America] still remained vulnerable to a substantial number of repurchase claims.”
Finally, the court also found sufficient allegations that Bank of America’s internal controls over financial reporting were inadequate, and that the company had not prepared its financial statements in accordance with generally accepted accounting principles.
This important decision in favor of investors allows the lead plaintiff to move forward with the prosecution of this case as a proposed class action on behalf of investors who purchased Bank of America securities during the class period from February 27, 2009 through October 19, 2010.
If you have any questions about the court’s July 11, 2012, decision, or about the case against Bank of America in general, please contact BR&B partners M. Richard Komins (firstname.lastname@example.org) or Mark R. Rosen (email@example.com).