By Shahien Nasiripour in Washington
The states of New York and Delaware won the right to intervene in a proposed $8.5bn settlement agreement over soured mortgage bonds between Bank of America and a group of aggrieved investors.
New York attorney-general Eric Schneiderman and Delaware?s Beau Biden say the deal is inadequate to investors and that the trustee for the investors, Bank of New York Mellon, broke state laws. Mr Schneiderman asked the judge overseeing the agreement to reject it.
Bank of America struck the June accord with 22 institutional investors, including the Federal Reserve Bank of New York and bond group Pimco, to settle claims that the bank repurchase home loans bundled into 530 securities with an original loan balance of $424bn. BNY Mellon agreed to the deal on behalf of all investors in the securities.
The potential settlement has since come under criticism from a variety of investors and government agencies, including the insurer AIG and the Federal Deposit Insurance Corporation, which have either asked for the deal to be rejected or for more information so they can evaluate its merits.
US Judge William Pauley granted Mr Schneiderman and Mr Biden?s request to intervene in the case, arguing that their actions ?will protect the interests of absent investors?.
?The action concerns far more than the financial interests of a few sophisticated investors,? Judge Pauley wrote in his November 18 order, rejecting claims by BNY Mellon, which argued that the states lacked the standing to intervene.
?Today?s ruling is an important victory in attorney-general Schneiderman?s continued work to protect the integrity of New York?s global financial markets while providing meaningful relief to those who have suffered from the mortgage crisis,? Danny Kanner, spokesman for Mr Schneidermann, said.
Mr Schneiderman has said that BNY Mellon ?knowingly, repeatedly and consistently? misled investors. He claims the bank, the world?s largest trustee, engaged in ?repeated fraud and illegality?. The two state legal officers have vowed to investigate wrongdoing on Wall Street.
Now that the state attorneys-general are parties to the case, they have the standing to request that the judge either reject the accord or to push BofA to strike a more generous settlement for investors.
This could complicate efforts by BofA to limit its exposure to allegedly faulty mortgage practices. The company?s shares have plunged 59 per cent this year in part on concern the bank faces unresolved and unknown mortgage liabilities. Its shares closed at $5.49 on Monday, the lowest since March 2009.
Both state legal officers have pending investigations into allegedly faulty mortgage securities. Mr Schneiderman and Mr Biden will now have access to files and correspondence BNY
Mellon and BofA produce as part of the discovery process. The state of New York has argued that BNY Mellon and BofA in effect colluded to strike a settlement, and that BNY breached
its obligation to investors.
Kevin Heine, a spokesman for BNY Mellon, said the trustee did not oppose efforts by investors to object to the accord. ?However, we continue to respectfully believe that those interests are adequately represented without the intervention of state attorneys-general,? Mr Heine said.
? The Financial Times Limited 2011