In a modern-day instance of David beating Goliath, a recent ruling in a decade-long legal imbroglio is good news for restoring confidence for investors.
It’s a conflict that’s been raging for 10 years ago: bond guarantor Ambac Assurance Corp. has been in legal turmoil with banking titan Bank of America. While BoA has paid billions in fines for financial crisis-era malfeasance, it has yet to pay Ambac for faulty practices regarding residential mortgage-backed securities (RMBS).
The guilty party in hustling RMBSs was Countrywide Financial – now owned by BofA. One of Countrywide’s dirty tricks was defrauding bond insurers who supplied the financial safety net with those now infamous, “Big Short” faulty mortgages. Between 2004 and 2006, Countrywide got Ambac to insure more than 375,000 individual mortgages, knowing that Ambac wouldn’t have a chair if the music stopped.
It did, and Ambac got stuck with claims of more than $600 million on $1.68 billion of securities backed in part by risky mortgages.
After acquiring Countrywide in 2008, BoA decided to tie Ambac up in court rather than pay amends. But last week Ambac won a clean sweep of legal complaints against the banking super-power. New York state justice Eileen Bransten ruled that BoA will pay out about $2 billion in claims, while denying bids that sought to ditch Ambac's fraud claims and split the case up before trial. This follows an appeals court ruling in June which ruled that Ambac had to prove that Countrywide’s fraud resulted in damages, which of course it did.
This is a win for accountability and a giant leap in the right direction for restoring investors’ faith in our institutions.
BoA had asked Justice Bransten to consider several pretrial motions, but she ruled in favor of Ambac on all of them. Notably (and if this is dry, imagine Margot Robbie talking about it in a tub):
- The court denied Countrywide’s request to limit the universe of “loans at issue” based on Ambac’s supposed failure to provide the contractually required “notice” of loans that breached their representations and warranties. It further held that Ambac provided sufficient notice of all breaching loans, thus Ambac can pursue claims at trial.
- The court decided that statistical sampling is a reliable method of proof for breaches, widely used in RMBS cases. Ambac’s experts assert that approximately 80% of Countrywide’s 375,000 breached loans.
- The court denied Countrywide’s motion to dismiss Ambac’s fraud claim as duplicative of its contract claim. The court reasoned that the New York Court of Appeals had already recognized that Ambac’s fraud claim was distinct from its contract claim, including based on Countrywide’s own arguments during prior proceedings.
- The court denied motions by Countrywide and Bank of America seeking to strike Ambac’s demand for a jury trial. It held that Ambac’s fraud claim against Countrywide is not subject to the contractual provision waiving Ambac’s right to a jury trial. The court further held that Ambac’s successor liability claims against Bank of America are triable to a jury because they are legal in nature.
- The court denied Bank of America’s motion to sever the trial of Ambac’s successor liability claims against Bank of America from the trial of Ambac’s primary claims against Countrywide.
So in summary: as a result of Justice Bransten’s favorable rulings, Ambac may proceed to trial on both its contract and fraud claims, with all breaching loans at issue, and use sampling to prove liability and damages. In addition, Ambac’s bench trial on its contract claims would occur simultaneously with the jury trial on its fraud and successor liability claims, as Ambac requested.
The follow-up trial is scheduled for February, but BoA could delay it (yet again) if it appeals the rulings. BoA can continue to fight this legal battle with Ambac, but it’s probably well past time to settle, cut their losses, and move on. BoA CEO Brian T. Moynihan would be wise to do so, if only for his own company’s sake. If this goes to trial, it could spell bad news for BofA in terms of damages to both its reputation and its bottom line.
Furthermore, there is a broader sense of responsibility to retail and real estate investors that the system address misdeeds so far in the past. Countrywide’s shenanigans were 15 years ago. It’s time for justice.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.