Judge Robert Sweet of the US District Court in Manhattan dismissed the Bank of America Corp (NYSE:BAC)’s suit against the securities unit of Deutsche Bank AG (USA) (NYSE:DB) and BNP Paribas SA (EPA:BNP) for their role in the sale of notes issued by Taylor Bean’s Ocala Funding unit. Bank of America accused the two foreign banks of negligence and breach of fiduciary duty.
In a 39-page report, Judge Sweet said that the units acting as brokers in the sale “owed no duty to investigate or verify the representations” made in a private placement. He also asked the two banks to amend their suit against Bank of America, based on the bank’s claims that the fraud at Taylor Bean absolved it of liability.
Seth Klarman Tells His Investors: Central Banks Are Treating Investors Like “Foolish Children”
"Surreal doesn't even begin to describe this moment," Seth Klarman noted in his second-quarter letter to the Baupost Group investors. Commenting on the market developments over the past six months, the value investor stated that events, which would typically occur over an extended time frame, had been compressed into just a few months. He noted Read More
The mortgage units of Deutsche Bank AG (USA) (NYSE:DB) and BNP Paribas SA (EPA:BNP) had invested in the notes issued by Taylor Bean’s Ocala Funding unit. Deutsche Bank and the BNP Paribas subsidiary sued Bank of America, which served as trustee for the notes in 2009 for breach of contract over the bank’s alleged failure to secure $1.75 billion in cash and mortgage loans on their behalf.
The Bank of America Corp (NYSE:BAC) seemed to turn the tables by suing BNP Paribas Securities Corp. and Deutsche Bank Securities Inc. These banks had arranged the sales in which their affiliates invested.
Ocala Funding LLC, a mortgage-financing vehicle created by Taylor Bean in 2005 to purchase its home loans, was bundled into securities and sold to investors such as Freddie Mac. Ocala funded its business by issuing short-term notes that it sold to investors. Ocala had a key role in the seven year, multi-billion dollar fraud by Lee Farkas, the founder of Taylor Bean. It also brought down the Alabama’s Colonial Bank, the main lender of Taylor Bean.
When Taylor Bean’s mortgage assembly line collapsed in 2009, all the parties that were involved like the banks, Federal Deposit Insurance Corp., investors started pointing fingers at each other. Farkas’ fraudulent scheme involved Colonial “purchasing” mortgage loans from Taylor Bean that had already been sold to other investors.
Taylor Bean collapsed after federal regulators uncovered evidences of fraud and suspended its authority to make loans insured by the government agencies. Farkas is serving a 30-year prison sentence for his role in the scheme. He is appealing his conviction. A handful of other executives from Colonial and Taylor Bean have also been sentenced to prison for their roles in the fraud.