United States ex rel. O'Donnell v. Countrywide Financial Corp.
83 F. Supp. 3d 528
S.D.N.Y.2015Background
- Countrywide’s High Speed Swim Lane (HSSL) program, led by defendant Mairone, prioritized rapid, high-volume loan originations and reduced underwriting safeguards.
- Countrywide sold large pools of loans to Fannie Mae and Freddie Mac as “investment quality” on a rep-and-warrant basis; purchasers relied on sellers’ representations rather than inspecting every loan.
- Internal quality-assurance reports and independent quality-control audits showed very high defect rates in HSSL loans (QA reports showed "high risk" rates rising above 80%; GC audits found ~30% severely unsatisfactory; government experts estimated ~42.8% materially defective).
- Mairone and other Countrywide executives received repeated warnings about deteriorating quality, reduced error correction rates (≈5–6%), and took steps that increased production incentives and restricted circulation of adverse reports.
- A jury found Countrywide (and successor Bank of America) and Mairone liable under FIRREA for committing mail and wire fraud (civil standard); defendants moved for JMOL or a new trial, which the court denied.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether defendants made material misrepresentations about loan quality | Countrywide represented loans were "investment quality" and purchasers relied on those representations when buying and pricing loans | Defendants argued QA evidence did not show loans were worse than Fannie/Freddie could reasonably expect, and contractual repurchase remedies negate materiality | Court: Representations were material; buyers depended on seller warranties and repurchase rights do not negate materiality |
| Whether evidence showed loans were materially defective | QA reports, audits, internal reviews, emails, and expert analysis showed large, systemic defect rates in HSSL loans | Defendants downplayed QA reports as procedural and relied on final QC audits only | Court: Evidence (QA + QC + experts) was sufficient; QA reports were reliable indicators of substantive defects |
| Whether the fraud claim was barred as merely contract breach (Bridgestone/Firestone argument) | Government: mail/wire fraud elements satisfied; federal fraud statutes are not limited by common-law contract limitations; misrepresentations were collateral/extraneous or independent fraud | Defendants: misrepresentations were contractual warranties, so only breach of contract | Court: Rejected defense; mail/wire fraud actionable if statutory elements met; government satisfied Bridgestone/Firestone exception (affirmative misrepresentations of present fact) |
| Whether defendants (Mairone and Bank) acted with requisite scienter | Circumstantial evidence — QA warnings, reduced controls, concealment, steering-committee involvement — support inference of knowing participation in scheme | Mairone claimed she lacked awareness that HSSL produced loans that were not "investment quality"; Bank argued insufficient evidence of corporate scienter | Court: Evidence supported jury inference of fraudulent intent for Mairone and corporate actors; other executives’ involvement also supported corporate scienter |
Key Cases Cited
- Neder v. United States, 527 U.S. 1 (1999) (materiality standard for fraud: tendency or capacity to influence decisionmaker)
- Durland v. United States, 161 U.S. 306 (1896) (mail/wire fraud not limited by common-law fraud constraints)
- Bridgestone/Firestone, Inc. v. Recovery Credit Servs., Inc., 98 F.3d 13 (2d Cir. 1996) (contractual misrepresentations may be actionable fraud where collateral/extraneous)
- United States v. Guadagna, 183 F.3d 122 (2d Cir. 1999) (intent may be inferred from circumstantial evidence of scheme)
- AUSA Life Ins. Co. v. Ernst & Young, 206 F.3d 202 (2d Cir. 2000) (corporate scienter can be established by intent of corporate agents)
- United States v. Corsey, 723 F.3d 366 (2d Cir. 2013) (materiality focuses on capacity to influence decisionmaker, not victim's subsequent actions)
- Lightfoot v. Union Carbide Corp., 110 F.3d 898 (2d Cir. 1997) (standard for new trial: verdict is seriously erroneous or a miscarriage of justice)
- Brady v. Wal-Mart Stores, Inc., 531 F.3d 127 (2d Cir. 2008) (standard for judgment as a matter of law: verdict unsupported by evidence constitutes sheer surmise)