[ by Howard Haykin  ]  

Prudential Financial has sued Bank of America on claims that the bank and Merrill Lynch engaged in "racketeering" in connection with mortgage-backed securities ("MBS") sales to the insurer.  Both BofA and Merrill allegedly conducted a "massive multiyear scheme" to defraud the insurer on sales of $2 billion in MBS's from 2004 to 2007.

Among other things, the filed suit claims that:

• Prudential purchased $2 billion worth of MBS's from the defendants;
• Mortgage loans underlying the securities defaulted in large numbers, rendering the securities worthless;
• BofA and Merrill Lynch operated integrated securitization operations - making mortgage loans and packaging those loans into securities;
• Prudential relied on the defendants’ false statements misrepresentations made in the securities-offering documents regarding the quality of the securities and mortgage loans when making purchases.
• The securities were misrepresented, for example, by artificially inflating their values and artificially lowering their attendant risks.
• BofA did not follow the underwriting guidelines detailed in the securities-offering documents, which set the parameters for whether a loan should be issued to a borrower based on the borrower’s ability to pay back the loan.
• Defendants “knowingly acquired and securitized loans that had been originated with virtually no regard for the borrowers’ ability to repay their obligations.”
• A loan-file review of 4,500 BofA loans by AIG (American International Group) found that 90% of such securitized loans did not meet those companies' underwriting guidelines.

Other Lawsuit Claims.   Bank of America and Merrill were also for failing to reveal prior to the merger that Merrill was in deep financial trouble as a result of heavy gambling on subprime-mortgage-backed securities.  The shareholders settled with the bank early this year for $62.5 million.  In re BofA Corp. Sec., Derivative & ERISA Litig., No. 09-MD-2058, settlement reached (S.D.N.Y. Jan. 24, 2013).

Finally, the lawsuit alleges that both Bank of America and Merrill Lynch violated New Jersey's RICO (Racketeer Influenced and Corrupt Organizations) Act.  In addition to the racketeering count, the suit makes claims for common-law fraud, fraudulent inducement, equitable fraud, aiding and abetting fraud, neglige

The Case:   Prudential Insurance Company of America et al. v. Bank of America N.A. et al., No. 13-CV-01586, complaint filed (D.N.J. Mar. 14, 2013).

It is noted by Reuters that, in January, Bank of America agreed to a $10 billion settlement of a long-term dispute with Fannie Mae, over mortgage repurchase claims.

For further details, go to:   [The Street, 4/3/13] and [Reuters Blog Post, 4/3/13].