Lara Samuels 

On October 23, 2013, a federal jury in the Southern District of New York returned a guilty verdict for Bank of America and one of Countrywide’s former executives, Rebecca Mairone, for fraud charges arising out of actions related to the financial crisis.[1]  The matter originated from a “whistleblower” case brought by former Countrywide executive Edward O’Donnell,[2] who shed light on the company’s “Hustle” (Highway Speed Swim Lane, or HSSL), a program created in 2007,[3] which removed checkpoints for loan quality and based employees’ compensation solely on the volume of loans sold.  Bank of America, which purchased Countrywide in 2008, denied any wrongdoing and claimed that no fraud occurred.[4]

In U.S. ex rel. O’Donnell v. Bank of America Corp., the jury had to decide whether the government, by a preponderance of credible evidence, established the elements required to hold the bank defendants, Mairone, or both, liable for fraud.[5]  The government brought the case under the False Claims Act,[6] which requires three elements to establish fraud liability: first, the existence of a scheme to defraud Federal National Mortgage Association (Fannie Mae) or Federal Home Loan Mortgage Association (Freddie Mac) – or both – of money or property by means of false or fraudulent pretenses, representations, or promises; second, the defendants’ participation in the scheme to defraud with knowledge of its fraudulent nature and with specific intent to defraud; third, at least one use of the U.S. mail or of interstate wire communications in the execution of the scheme to defraud.

In the present case, the government alleged that Countrywide Home Loans, Inc., Countrywide Bank, FSB, and Bank of America, N.A., fraudulently and systematically induced Fannie Mae and Freddie Mac to buy mortgage loans by using the “Hustle” strategy.[7]  Simultaneously, prosecutors argued that Countrywide removed all meaningful checkpoints on loan quality, while incentivizing its employees to unload low quality loans onto Fannie Mae and Freddie Mac by basing its employees’ compensation solely on the volume and speed of loans originated.[8]  According to the government, the truth about the loan quality would have been important to a reasonably prudent person in deciding whether to purchase these loans, or how to price them.[9]  Additionally, the complaint alleged that the wrongful acts were executed using interstate mail carriers and interstate wire.[10]  The jury found both Mairone and the Bank Defendants liable for fraud.  News sources report that the government may seek over $800 million in damages.[11]

This verdict signifies the first trial in which a jury has held a major U.S. bank accountable for actions leading up to the financial crisis.[12]  Moreover, the case is one of few trials stemming from the financial crisis and the “first financial-crisis related case against a bank by the Justice Department to go to trial under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) [in conjunction with the False Claims Act].”[13]

Although related to only a small fraction of the mortgage market, this verdict arguably sends a message to the public that the “greed and lies”[14] that nearly caused the collapse of Fannie Mae and Freddie Mac do not go unpunished. It may also encourage more prosecutors to continue investigations and bring action against similar defendants, as well as motivate other parties to file similar lawsuits.  Another interesting aspect of this case is the court’s decision to allow the introduction of the term “Hustle,” despite potential unfair prejudice to the defendants, as it paints the banking industry as treating quality control and underwriting as a “joke” or as a manipulative scheme to profit at the expense of others.[15]

On the other hand, this case may perpetuate a system that allows for whistleblower executives to shift responsibility entirely on a welcome scapegoat and perhaps even to receive a profit, while escaping liability for their involvement.  Bank of America’s spokesman points out that O’Donnell could receive a reward of $1.6 million in this case.[16]  Another report argues that, in an effort to hold the banking industry accountable for it wrongdoings, mid-level executives become the face of the banks’ misconduct, rather than the higher-level executives who not only profited much more significantly from the scheme, but who also initiated the pressure on mortgage underwriters to manipulate borrower information and expedite the loan process.[17]