Prudential hits Bank of America with $2 billion racketeering suit

By Peter H. Hamner, Esq., Senior Legal Correspondent

Prudential Insurance alleges in a New Jersey federal court lawsuit that Bank of America and Merrill Lynch engaged in racketeering as part of a scheme to defraud and mislead it on sales of $2 billion worth of mortgage-backed securities.

The complaint filed in the U.S. District Court of the District of New Jersey says BofA and Merrill Lynch sold the securities to Prudential from 2004 to 2007 based on inflated credit ratings and false information about the quality of the underlying mortgage loans.

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The 142-page suit claims the defendants’ securitization process enabled them to perpetrate a “massive, multi-year scheme” in violation of New Jersey’s Racketeer Influenced and Corrupt Organizations Act, N.J. Stat. Ann. §§ 2C:41-2(c) and 2(d), and federal securities law.

In addition to the racketeering count, the suit makes claims for common-law fraud, fraudulent inducement, equitable fraud, aiding and abetting fraud, negligent misrepresentation, and violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933.

(Click here for the Prudential Complaint on Westlaw.)

Prudential describes itself on its website as “one of the largest life insurance companies in the U.S.,” and Merrill Lynch touts itself as the “largest brokerage in the world” since its 2008 merger with BofA.

BofA spokesman Lawrence Grayson acknowledged the pending litigation but declined to elaborate, and Prudential spokesman Simon Locke also declined to comment.

Mortgage-backed securities pay dividends drawn from principal and interest payments made by mortgage borrowers whose loans have been pooled into a trust and distributed to investors.

BofA and Merrill Lynch allegedly operated integrated securitization operations, making mortgage loans and packing those loans into securities, according to the complaint.

The suit claims Prudential purchased $2 billion worth of mortgage-backed securities from the defendants, and the mortgage loans underlying the securities defaulted in large numbers, rendering the securities worthless.

Prudential says it relied on the defendants’ alleged false statements made in the securities-offering documents regarding the quality of the securities and mortgage loans when making purchases.

The alleged misrepresentations attracted investors like Prudential by artificially inflating their value and lowering the risks associated with the securities, the suit says.

According to the complaint, BofA did not follow the underwriting guidelines detailed in the securities-offering documents.

Underwriting guidelines set the parameters for whether a loan should be issued to a borrower based on the borrower’s ability to pay back the loan.

The suit says the 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 over 4,500 BofA loans by American International Group found that a “staggering” 90 percent of loans examined did not meet the stated underwriting guidelines, the complaint says.  These practices allegedly led to higher default rates among the underlying mortgage loans, the plaintiffs’ claim.

Additionally, the suit alleges BofA provided the credit rating agencies with inaccurate underwriting information, which resulted in them issuing inflated “investment grade” ratings.  The complaint calls this a “garbage-in, garbage-out process.”

Prudential also claims the defendants “bullied” the credit-rating agencies into rating the securities higher than they deserved by threatening to take their business elsewhere if they did not receive the desired ratings.

The suit seeks recovery of Prudential’s monetary losses, treble damages, rescission and recovery of amounts paid for the securities, plus punitive damages, interest, and attorney fees and costs.

The December 2008 merger of BofA and Merrill Lynch spawned a number of angry BofA shareholder suits, which were consolidated in New York federal court.

The suits faulted the bank 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).

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).