Court allows AIG to sue Bank of America for fraud

Bank of America has been trying to rid itself of numerous legal claims from investors.
STAN HONDA/AFP/Getty Images/File
Bank of America has been trying to rid itself of numerous legal claims from investors.

NEW YORK — A California judge has opened the door for the American International Group to pursue a fraud claim of more than $7 billion against Bank of America for losses it suffered on mortgage securities sold under duress after the US government rescued AIG in 2008.

The ruling, issued late Monday, is a setback for Bank of America, which has been trying to rid itself of numerous legal claims from investors who bought mortgage securities issued by the bank’s Countrywide Financial and Merrill Lynch units.

In the California case, in which AIG, the giant insurance company, sued Bank of America over fraudulent mortgage securities, the bank had argued that AIG had no standing to sue because it had transferred that right when it sold the instruments to the Federal Reserve Bank of New York in the fall of 2008.


Mariana R. Pfaelzer, a federal judge in the central district of California, disagreed. She sided with AIG in a ruling that also raised questions about the role of the New York Fed in the wake of its efforts to contain the huge damage from the financial crisis that erupted when Lehman Bros. was forced into bankruptcy in September 2008.

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AIG said in a statement, ‘‘As a result of the court’s decision, AIG is able to pursue its full damages claim against Bank of America.’’

Asked to comment on the judge’s decision, Lawrence Grayson, a spokesman for Bank of America, said the court ruling allowed it to ‘‘pursue additional discovery before the matter is fully decided.’’ He said the bank believes it has strong defenses to AIG’s accusations.

New York Fed officials, testifying earlier on behalf of Bank of America, maintained that they had intended to receive the rights to bring fraud claims related to the mortgage securities purchased by Maiden Lane II, the investment vehicle set up to complete the AIG bailout.

In depositions in March, however, Fed officials could produce no evidence that the fraud claims had been specifically transferred under the deal, as required under New York law.


Pfaelzer wrote: ‘‘To the extent that the Federal Reserve Bank of New York intended for Maiden Lane II to acquire these claims, its intentions were not expressed to AIG.’’

A spokesman for the New York Fed declined to comment on the ruling. Previously, the New York Fed said it had agreed to testify in the case because doing so helped it obtain the best possible settlement for Maiden Lane II.

While Pfaelzer’s ruling added to the legal claims faced by Bank of America, it emerged after the bank successfully disposed of several others.

On Monday, in the latest such effort, the bank agreed to pay $1.7 billion to settle a long-running dispute with MBIA, a mortgage bond insurer.

The bank could erase another claim on May 30 if a judge in New York state court allows an $8.5 billion settlement struck between Countrywide and a group of big investors in 2011 to be completed. Investors objecting to the deal say the amount of the settlement is insufficient.


The California judge’s finding that AIG has standing to sue Bank of America may also be bad news for other banks that sold troubled mortgage securities to the insurer.

AIG has not yet sued other institutions related to the securities that went into Maiden Lane II; at least $11 billion in losses involve other banks.