Overview
In an opinion today, Judge Rakoff rejected motions to set aside a jury verdict in the so-called “Hustle” case, in which the government accused Countrywide (later acquired by Bank of America) and an officer named Rebecca Mairone of a scheme to defraud Fannie Mae and Freddie Mac into buying faulty mortgages. The jury had ruled against the defendants and Judge Rakoff then ordered damages of $1.3 billion (see our prior posts on the case here). The defendants sought to set aside the verdict by arguing “that the Government's evidence did not establish that the HSSL loans were of lower quality than Fannie and Freddie could have reasonably expected, and therefore that they made no misrepresentations that were material,” but Judge Rakoff rejected the argument as “border[ing] on the frivolous”:
[T]he Government's evidence showed that Countrywide's representations regarding the quality of the HSSL loans were critical to Fannie's and Freddie's decision to purchase them and at what price. This was because Fannie and Freddie purchased these loans on a so-called "rep and warrant" basis. As it was not feasible to scrutinize individually the multitudes of loans they purchased, they relied instead on the sellers' representations and warranties regarding the quality of the loans . . . . The fact that the contracts between Countrywide and the government-sponsored entities provided for repurchase of faulty loans does not undermine this conclusion. A seller's promise to refund the buyer's money if a defect is discovered after purchase does not render immaterial its misrepresentations about the product's quality at the time of sale. Nor is it of any import that Fannie and Freddie may have been aware that a substantial proportion of loans that they purchased from other lenders around this time were similarly defective. Perhaps that should have made Fannie and Freddie more careful or suspicious, but the evidence at trial was more than enough to warrant the jury in finding that they continued to rely on the defendants' representations of investment quality . . . . Taken together, this evidence is overwhelming, and defendants' continuing contention that there was insufficient evidence of a material misrepresentation to support the jury's verdict borders on the frivolous.
