Adding to Bank of America’s Countrywide Legal Woes, Prominent Institutional Investors File Lawsuit

(August 1, 2011) – In the latest development of an ongoing legal saga, a group of 15 prominent institutional investors has sued Bank of America (BofA) for its subsidiary Countrywide Financial’s alleged improprieties involved with the sale of mortgage-backed securities.

The group, including BlackRock, the California Public Employees’ Retirement System (CalPERS), T Rowe Price Group, TIAA-CREF, and some in Europe, sued BofA in Los Angeles federal court, after deciding not to join a $624 million settlement that a court approved in February.

Accusing Countrywide Financial of perpetrating “massive and pervasive” fraud, the plaintiffs are suing BofA, which purchased the mortgage-lender on July 1, 2008, to recover their losses stemming from Countrywide’s sale of unsound mortgage-backed securities. According to the 425-page complaint, the 15 institutional investors alleged that Countrywide and its officials like former CEO Angelo Mozilo engaged in improper business practices and willfully misrepresented the integrity of the company’s lending practices and the quality of its mortgage-backed securities.

BofA pledged that it would fight the lawsuit. “It is unfortunate that select investors chose to opt out of a fair and equitable agreement to settle these issues,” Bill Halldin, a Bank of America spokesman, said to Reuters. “We intend to vigorously defend these claims.”

The lawsuit comes on the heels of an announcement last month that BofA had agreed to a mammoth $14 billion settlement with investors who bought ill-fated subprime mortgage securities from Countrywide. About $8.5 billion of that settlement was earmarked for a group of larger investors led by Pacific Investment Management Co. (PIMCO), the Federal Reserve Bank of New York, and BlackRock. The settlement would have been the banking industry’s largest single settlement stemming from the 2008 housing market collapse, though it seems that some embittered investors, including BlackRock, were not happy with the size and details of the proposed deal.

The 15 institutional investors’ lawsuit is not the first legal challenge to BofA’s proposal to end litigation with Countrywide investors. On July 5, a group of 11 mortgage-bond investors calling themselves Walnut Place filed a challenge in New York County Supreme Court attacking the July deal’s fairness.

“Walnut Place has serious concerns about the secret, non-adversarial, and conflicted way in which the proposed settlement was negotiated and about the fairness of the terms of the proposed settlement,” said the group in the court filing.