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NY attorney general hits BoA securities settlement

New York Attorney General Eric Schneiderman has urged a state judge to reject the proposed $8.5 billion Bank of America settlement of investor losses from 530 mortgage-backed securities, calling it unfair and alleging trustee Bank of New York Mellon engaged in "repeated fraud" in connection with the securities sale.

BNY Mellon called the allegations "baseless."

In court papers filed late Thursday, Schneiderman said the settlement represents "a fraction of the losses suffered." He asked Justice Barbara Kapner to let him intervene in the proceeding in state Supreme Court that began with BNY Mellon's petition for settlement approval with Bank of America on behalf of 530 trusts. At a scheduling hearing Friday afternoon, she made no immediate ruling on Schneiderman's request.

"The attorney general believes that the proposed settlement is unfair to trust investors, many of whom are New York residents," Assistant Attorney General Amir Weinberg wrote. "Indeed, BNYM's conduct, both specifically as to the negotiation of the proposed settlement and more generally as to the performance of its duties as trustee, violated its fiduciary duty to investors, as well as the Martin Act and Executive Law."

The court filing said Schneiderman's investigation so far "reveals that BNYM breached its duties to the trusts' investors in violation of the common law of the state of New York, engaged in repeated fraud and illegality in violation of Executive Law and breached General Business Law by engaging in improper conduct in connection with the sale of securities."

Schneiderman spokesman Danny Kanner declined to comment Friday on whether the attorney general will also prosecute BNY Mellon under the state's Martin Act, which prohibits misrepresentations to investors. He didn't immediately know the total investor losses from the 530 trusts, he said.

BNY Mellon spokesman Ron Gruendl called the allegations "baseless," and "unsupported" by the facts and the law.

"We will fight them if necessary in court," he said Friday. "We are confident that we have fulfilled in all respects our responsibilities as Trustee. The AG's action is misguided and fails to comprehend the role of the Trustee and the benefit the settlement would provide to investors."

Bank of America spokesman Lawrence Grayson declined to comment.

Kathryn Wylde, president of Partnership for New York City that represents major businesses there, called Schneiderman's action disappointing after earlier pledges to make the state a good place to do business, and said it came on the day the stock market closed with its worst drop since 2008.

"To accuse a large New York employer, with a strong track record, of fraud, in the course of what's essentially a ministerial function with regard to securities appears to be grandstanding of the worst kind," she said.

BNY Mellon filed a petition for court approval of the settlement June 29. In late July, the attorney general's office requested documents in the case for review. Separately, it has subpoenaed documents from several banks as part of its investigation into the mortgage crisis and collapse of mortgage-backed securities in 2007-2008 that helped push Wall Street and the U.S. economy into a tailspin.

According to the court papers, the claims arise from "a massive collapse in value" of mortgage loans from 530 New York trusts comprising "hundreds of millions of dollars in residential mortgage-backed securities." The claims are against the trust creators Countrywide Home Loans Inc. and parent Countrywide Financial Corp. and trust servicer Bank of America, which in 2008 bought Countrywide.

BNY Mellon was and remains trustee, with a fiduciary duty to investors, and was required to ensure the proper transfer of loans from Countrywide to the trusts and represented to the public that it did, according to the attorney general's office.

"The ultimate failure of Countrywide to transfer complete mortgage loan documentation to the trusts hampered the trusts' ability to foreclose on delinquent mortgages, thereby impairing the value of the notes secured by those mortgages," Schneiderman wrote. "These circumstances also apparently triggered widespread fraud, including Bank of America's fabrication of missing documentation."

Bank of America has agreed to pay $8.5 billion to investors for allocation among the trusts by a formula based on past and estimated future losses. The settlement also includes changes in loan servicing methods that Schneiderman called "vague and permissive."