Judge Cote yesterday ruled that Merrill Lynch (now part of Bank of America) could face punitive damages for its role in selling faulty mortgage securities to Fannie Mae and Freddie Mac. The decision was one of a series of rulings on various motions to dismiss portions of the 16 lawsuits brought by the Federal Housing Finance Agency (or, “FHFA”), the conservator to Fannie Mae and Freddie Mac. Judge Cote acknowledged that punitive damages are generally intended to “vindicate public rights,” but rejected Merrill’s argument that Fannie Mae and Freddie Mac are not part of the “general public.” She concluded that their “importance to the American economy and their quasi-governmental status is well established.” She also ruled the substantive allegations were sufficiently extreme for punitive damages:
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. 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.