Monday was (another) dreadful day for Bank of America. The bank’s shares closed at a two-year low, thanks in part to AIG’s double whammy: a $10 billion fraud suit against BofA and the insurer’s simultaneous motion to intervene in opposition to BofA’s proposed $8.5 billion settlement with Countrywide mortgage-backed securities noteholders. Bank of America and Countrywide’s securitization trustee, Bank of New York Mellon, thought the $8.5 billion deal would put their MBS woes behind them. Instead the proposed settlement seems to have made the two banks into bigger targets than they were before reaching an agreement with 22 big MBS investors.
There’s plenty of reason for BofA to worry about the AIG fraud suit. First off, the New York state court complaint was filed by Quinn Emanuel Urquhart & Sullivan, a familiar opponent for Bank of America. Quinn is counsel to the bond insurer MBIA in its MBS litigation against Countrywide, in which New York state supreme court judge Eileen Bransten has consistently sided with MBIA and Quinn Emanuel. (Among other crucial rulings, Judge Bransten rejected Bank of America’s preliminary argument that it’s not liable for Countrywide’s missteps.) Quinn also represents Fannie Mae and Freddie Mac, which forced Bank of America into a $2.8 billion settlement of MBS claims in January, and Allstate, which filed a $700 million MBS case against Countrywide in December. Different Quinn Emanuel lawyers are involved in the various BofA and Countrywide cases, but the firm isn’t starting from scratch.
The AIG fraud complaint is also a canny document. The suit lumps together allegations against Countrywide, Merrill Lynch, and BofA, painting all of them with the same tarry brush even though Countrywide and Merrill Lynch committed a good chunk of the alleged wrongdoing before they became part of BofA. Quinn includes public record information about their manifestly-deficient underwriting practices, but has brought the case as a fraud suit — not a contract case accusing BofA, Countrywide, and Merrill of breaching the representations and warranties on the mortgage loans underlying the securitizations AIG invested in. That way, AIG doesn’t have to show that it controls 25 percent of the voting rights, the threshold for standing in a securitization contract case. But under the causes of action the complaint asserts — state-law claims and federal claims under the Securities Act of 1933 — Quinn Emanuel doesn’t have to show that BofA, Countrywide, and Merrill acted with fraudulent intent.
Quinn partners Michael Carlinsky and Philippe Selendy, who signed the AIG complaint, also undoubtedly know that even if Bank of America’s $8.5 billion settlement is approved by Manhattan state supreme court judge Barbara Kapnick, their fraud case won’t be wiped out. BofA’s deal with the 22 MBS noteholders who negotiated the proposed settlement is expressly limited to investors’ breach-of-warranty claims. It doesn’t resolve securities fraud claims; in fact, three of the investors backing the proposed settlement have since sued Countrywide for fraud.
That’s why it’s so interesting that AIG filed its motion to intervene in the proposed settlement on the same day that it filed the fraud suit. The intervention petition, filed not by Quinn Emanuel but by Reilly Pozner, raises the now-familiar assertions that investors aren’t getting a big enough cash payout and that Bank of New York Mellon had a conflict in negotiating the deal because BofA agreed to indemnify BNY Mellon in a side-letter. But AIG is the first objector also to take aim at Gibbs & Bruns, the law firm that’s counsel to the 22 institutional investors that negotiated the proposed settlement.