A&O Shearman | Securities Litigation Blog | Second Circuit Reverses $1.2 Billion Penalty Against Bank Of America, Finding Lack Of Evidence Of The Contemporaneous Intent To Defraud Required To Establish Mail And Wire Fraud<br >  
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  • Second Circuit Reverses $1.2 Billion Penalty Against Bank Of America, Finding Lack Of Evidence Of The Contemporaneous Intent To Defraud Required To Establish Mail And Wire Fraud
     
    05/31/2016
    On May 23, 2016,  the United States Court of Appeals for the Second Circuit overturned a jury verdict finding that defendants had violated the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), and invalidated more than $1.2 billion in civil penalties.  The Court ruled that the Government had failed to establish that defendants, including Bank of America N.A. and Countrywide Home Loans, Inc. (“Countrywide”), had committed fraud because there was no evidence of the requisite intent to defraud at the time the contracts leading to the loan sales at issue were executed. U.S. ex rel. O’Donnell v. Countrywide Home Loans, Inc., — F.3d —, 2016 WL 2956743 (2d Cir. 2016).  The Second Circuit noted that, absent contemporaneous intent to defraud at the time a contract is entered into, the Government’s case amounted to nothing more than intentional breach of contract, which is not a predicate for a FIRREA offense.

    At trial, the Government alleged that defendants had implemented an actionable scheme to defraud Fannie Mae and Freddie Mac (“GSEs”) by providing them with loans under certain purchase agreements that they knew were not investment quality, contrary to the representations made by defendants in the agreements. The jury was instructed that a scheme to defraud was “a plan or design to obtain money or property by means of one or more false or misleading statements of a material fact” and that liability depended on a showing that each defendant “participated at some point in the scheme knowingly and with a specific intent to defraud.”

    On appeal, the Second Circuit found that the Government failed to establish the requisite intent to defraud.  The Court first stated that the terms of federal statutes, including the mail and wire fraud statutes, are presumed to incorporate common law principles “unless the statute otherwise dictates.” At common law, a fraud cannot be proven solely by contractual breach, although “a contractual relationship between the parties does not wholly remove a party’s conduct from the scope of fraud.”  The Court thus explained that the essential ingredient of a scheme to defraud based on misrepresentations (such as about the quality of the loans defendants provided to the GSEs) is an intent to defraud at the time the contract was made: “It is emphatically the case—and has been for more than a century—that a representation is fraudulent only if made with a contemporaneous intent to defraud.”  Because the Government conceded that its evidence showed only that the defendants had knowingly failed to live up to their contractual promises once made, the Court reversed the judgment and remanded the case with instructions to enter judgment for defendants.
    Category: Scienter

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