I sure hope the Securities and Exchange Commission and other members of the new joint mortgage-backed securities task force are paying attention to the docket in MBIA's New York State Supreme Court fraud and breach-of-contract suit against Countrywide. On Wednesday, MBIA's lawyers at Quinn Emanuel Urquhart & Sullivan sent a letter to Justice Eileen Bransten requesting that she order Countrywide to produce discovery on an internal fraud-tracking database "which MBIA had not previously known to exist." MBIA said it needs the discovery to prepare for upcoming depositions of former Countrywide employees who tried to expose its allegedly fraudulent mortgage underwriting practices, including the well-known whistleblowers Eileen Foster and Mari Eisenman.
I've said it before and I'm sure I'll say it again: Everyone pursuing mortgage-backed securities issuers owes a big debt to bond insurers, who were the first to file MBS suits and have fiercely litigated them for the last three years. In addition to records of the mortgage-fraud database, known as FACTS, MBIA wants Countrywide to turn over the employment files of "two former Countrywide loan officers whose fraudulent activities were initially covered up due to their profitability," and records of senior executive committee meetings that "should show that Countrywide deliberately passed on riskier loans to the secondary market while retaining safer loans for itself, again in violation of its representations and warranties."
MBIA wants the discovery to prepare for a final round of summary judgment motions, which are due in April. As you surely recall, Bransten issued rulings in January that paved the way for MBIA to recover on its insurance-law fraud and breach-of-contract claims. Bank of America has asked the state appellate court to review that part of the judge's decision; MBIA, in turn, has appealed Bransten's ruling that the insurer is not entitled to summary judgment on its MBS representations and warranties claims.
The docket also shows that MBIA wants to depose BofA CEO Brian Moynihan, but the bank's lawyers at O'Melveny & Myers have moved for a protective order against the deposition. "We have moved for a protective order because a chief executive officer of a major corporation may only be deposed when he has unique information that is not available through other means," a BofA spokesman said. "The discovery process remains fully available to MBIA, including through the numerous current and former executives that MBIA will be deposing." (MBIA has been granted leave to depose former Countrywide CEO Angelo Mozilo, for instance.)
Countrywide filed its response to MBIA's Feb. 15 letter on Thursday afternoon. The bank's letter to Bransten accused MBIA of resorting to "hyperbolic rhetoric and falsehoods" in order to try its case in the press. "MBIA cannot win the case it actually brought -- by proving that the loans in the securitizations at issue materially breached Countrywide's representations and warranties -- and instead seeks to try an entirely different, and irrelevant, case," the Countrywide letter said.
Last week Bank of America agreed to pay $1 billion to resolve the Justice Department's claims that it defrauded the government by underwriting Federal Housing Administration mortgages to unqualified borrowers. MBIA is making similar mortgage-origination allegations about the loans underlying securities it agreed to insure. And in the process it's demanding discovery that could be of use to all the other monolines and investors clamoring for a pound of the bank's flesh. Can Bank of America really afford to let this case continue?
I reached out to Countrywide counsel Mark Holland of Goodwin Procter but didn't hear back. MBIA counsel Jonathan Oblak of Quinn didn't return my phone call.
(This blog post was updated with Countrywide's response on Thursday afternoon. Earlier, the post was updated to include comments from a Bank of America spokesman.)
(Reporting By Alison Frankel)
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