Judge Urges Dismissal of Mortgage Suit Against Bank of America

A federal magistrate judge on Thursday moved to toss out a Justice Department lawsuit over a soured mortgage deal at Bank of America, dealing a potential setback to the government’s pursuit of Wall Street misdeeds.

The ruling, by Judge David S. Cayer, is nonbinding. A Federal District Court judge in Charlotte, N.C., will decide whether to accept or reject the recommendation to dismiss the lawsuit.

But if the judge adopts the suggestion, and judges often do, it could inspire other banks to test their luck in the courtroom. Ultimately, it could also undercut the Justice Department’s use of a novel legal theory against Wall Street.

The Justice Department has enjoyed success when invoking the Financial Institutions Reform, Recovery and Enforcement Act of 1989, or Firrea. Facing the obscure statute â€" which requires a criminal violation but uses the lower burden of proof of a civil case â€" banks are typically cowed into large settlements.

In response to the ruling on Thursday, a spokeswoman for the Justice Department said the agency “has filed a notice of objections with the District Court today.”

The government’s case sought to punish Bank of America for its sale of mortgage-backed securities to investors, including the Federal Home Loan Bank of San Francisco, which has a loose affiliation with the government. Bank of America, according to the Justice Department, lied to the investors about the risks involved.

The lawsuit cites emails from the bank’s employees expressing concern about the quality of the mortgages underling the securities, including one employee who wrote that some mortgages were “like a fat kid in dodge ball, these need to stay on the sidelines.”

Bank of America, which was represented by Skadden Arps, denied the accusations and asked that the case be dismissed. It was assigned to a magistrate judge; holders of that position typically handle scheduling and other procedural matters but occasionally issue rulings as well.

The magistrate judge agreed with Bank of America, concluding that the Justice Department had failed to meet the requirements for a case involving false statements to a government agency. The Federal Home Loan Bank is not an agency. And the Justice Department’s accusations, the magistrate judge ruled, fail to satisfy the requirement that misstatements materially affected the Federal Home Loan Bank’s government regulator.

A spokesman for Bank of America, Lawrence Grayson, said, “We are pleased with the magistrate judge’s recommendation to dismiss this matter.”