In an opinion today, Judge Rakoff ordered Bank of America to pay $1.3 billion in the so-called “Hustle” case, in which a jury found that Countrywide (later acquired by Bank of America) and an officer named Rebecca Mairone engaged in a scheme to defraud Fannie Mae and Freddie Mac into buying faulty mortgages. Judge Rakoff rejected Bank of America’s argument that the statute at issue, FIRREA, required the penalties to be calculated by reference to the “net” gains or loss resulting from the alleged conduct:

While no analogy is perfect, a simple one will illustrate the point. If I sold you a cow for $100 saying it was a healthy dairy cow when I knew it had foot-and-mouth disease, you would in theory have a net loss of less than $100 since the cow would still be worth something as dead meat. But if you had known the truth, or, short of that, had known that I as the seller was intentionally lying to you about a material matter, you would never have bought the cow in the first place, so your out-of-pocket loss of $100 is really more reflective of the misconduct perpetrated upon you. Similarly, since I would have spent some money to purchase or raise the cow before I discovered it was diseased and duped you into buying it, my net gain from the sale would have been less than $100. But since you would have never purchased the cow from me if you knew that it had foot-and-mouth disease or that I had intentionally lied to you in trying to induce you to part with your $100, the $100 I received, that is, my gross gain, is far more reflective of the essential nature of my fraudulent misconduct than my “net” gain. . . . Analogies aside, it bears mentioning that by virtue of this fraud the Bank Defendants managed to unload a vast portfolio of risky assets on unwitting buyers and were thereby able to reduce the risk on their own balance sheet at a crucial moment in time. Indeed, Countrywide’s introduction of the HSSL program coincided with a severe contraction of the market for riskier mortgages and Countrywide’s understanding that it would no longer find willing buyers for the subprime mortgages that the Full Spectrum Lending division had churned out for years. Given that large, systemically risky portfolios of similarly dubious mortgage-backed assets were a significant contributor to the financial crisis, it strains credulity to imagine that FIRREA would require the Court to close its eyes to the overarching fraud and ask, “Yes, but what did the victims manage to recover in foreclosure?” The use of a “net” amount to calculate gain or loss would therefore fundamentally misconstrue the nature of the fraud and undermine Congress’s directive that the Court penalize and thereby deter this serious misconduct.

Judge Rakoff nevertheless, in his discretion, reduced the gross losses of $2.9 billion to $1.3 billion, based on the fact that the government’s own witness testified that 57% of the loans proved not to be “materially defective.” Judge Rakoff stated that the penalty was justified in the context of the case overall because “the evidence of the defendants’ fraudulent scheme and fraudulent intent was ample”:

[T]he defendants were fully prepared to jettison reasonable steps to assure loan quality in favor of volume, speed, and profits. Even when Countrywide’s own internal quality reports evidenced deteriorating loan quality, concerns echoed by Mairone’s own front-line staff, the defendants shunted critics and criticisms aside, doubled down on their risky behavior, and applied ever more pressure on loan specialists to ignore loan quality concerns. Furthermore, defendants purposefully ignored their contractual obligations to report to Fannie and Freddie all loans identified as defective, reporting only six HSSL loans as such, when, in fact, there were thousands. In short, while the HSSL process lasted only nine months, it was from start to finish the vehicle for a brazen fraud by the defendants, driven by a hunger for profits and oblivious to the harms thereby visited, not just on the immediate victims but also on the financial system as a whole.

Our prior posts on the case are here.