Judge Refuses to Dismiss FHFA Suit Against Merrill Lynch

Bank of America's ""Merrill Lynch"":http://corp.bankofamerica.com/ unit lost in an attempt to throw out an action from the ""Federal Housing Finance Agency"":http://corp.bankofamerica.com/ over mortgage-backed securities (MBS) sold to Fannie Mae and Freddie Mac.

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Merrill's motion to dismiss the case ""did not hold up"":https://ecf.nysd.uscourts.gov/doc1/127111555382 under scrutiny from U.S. District Judge Denise Cote, who is overseeing claims filed by FHFA against Merrill and a number of other banks. Only days prior, Cote ""denied a similar motion"":https://themreport.com/articles/jpmorgan-chase-fails-in-bid-to-dismiss-fhfa-suit-2012-11-06 filed by JPMorgan Chase, another of the 16 total defendants.

In actions against Merrill Lynch, Chase, and several others, FHFA asserts that offering documents used to market and sell residential MBS to Fannie and Freddie ""contained material misstatements or omissions with respect to the owner-occupancy status, loan-to-value ratio (├â┬ó├óÔÇÜ┬¼├ï┼ôLTV') ratio, and underwriting standards that characterized the underlying mortgages.""

In its argument to dismiss, Merrill claims--much like Chase did--that FHFA's allegations do not sufficiently back up fraud claims brought against the bank.

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Cote's ruling frequently cites her earlier opinion on Chase's motion, noting that FHFA's complaint ""fails and survives and similar fashions"" in its allegations against Merrill.

""As in Chase, the facts alleged in the Amended Complaint are sufficient to plead fraud with respect to the Offering Materials' representations regarding mortgage-underwriting standards,"" Cote writes.

As she did with Chase's motion, Cote agreed that FHFA's fraud claims over LTV and owner-occupancy information were not sufficiently supported.

""[T]he Amended Complaint relies entirely on the disparity between the statistics reported by the defendants and the results of the Agency's own analysis,"" the judge writes. ""As explained in Chase, when properly corroborated, such disparities may be sufficient to allege recklessness in support of a fraud claim. But mere negligence in conducting due diligence is not equivalent to reckless disregard of the truth.""

However, Cote refused to toss out FHFA's request for punitive damages, saying the agency's complaint ""adequately supports its demand.""

""FHFA alleges that the defendants acted recklessly by seeking to profit from ever more risky mortgage lending while, at the same time, passing on the risk (and ultimately the losses) associated with these practices to the public via their sale of securities to Fannie Mae and Freddie Mac,"" the opinion reads. ""FHFA further maintains that the defendants' practices in this regard contributed to a housing crisis that spurred the most severe economic downturn this country has experienced since the Great Depression. These allegations are sufficient to support the plaintiff's demand for punitive damages.""

A spokesperson for Bank of America declined to comment on the ruling.