NEW YORK -- Bank of America was found liable for fraud Wednesday over defective mortgages sold by its Countrywide unit, a major win for the U.S. government in one of the few trials stemming from the financial crisis.
After a four-week trial, a federal jury in New York found the bank liable on one civil fraud charge. Countrywide originated shoddy home loans in a process called "Hustle" and sold them to government mortgage giants Fannie Mae and Freddie Mac, the government said.
The four men and six women on the jury also found former Countrywide executive Rebecca Mairone liable on the one fraud charge she faced.
The U.S. Justice Department has said it would seek up to $848.2 million, the gross loss it said Fannie and Freddie suffered on the loans. But it will be up to U.S. District Judge Jed Rakoff to decide on the penalty. Arguments on how the judge will assess penalties are set for Dec. 5.
Any penalty would add to the more than $40 billion Bank of America (BAC) has spent on disputes stemming from the 2008 financial crisis.
"The jury's decision concerned a single Countrywide program that lasted several months and ended before Bank of America's acquisition of the company," Bank of America spokesman Lawrence Grayson said. "We will evaluate our options for appeal."
Marc Mukasey, a lawyer for Mairone, called his client a "woman of integrity, ethics and honesty," adding they would fight on. "She never engaged in fraud, because there was no fraud," he said.
Wednesday's verdict was a major victory for the Justice Department, which has been criticized for failing to hold banks and executives accountable for their roles in the events leading up to the financial crisis.
The government continues to investigate banks for conduct related to the financial crisis. The verdict comes as the government is negotiating a $13 billion settlement with JPMorgan Chase (JPM) to resolve a number of probes and claims arising from its mortgage business, including the sale of mortgage bonds.
The lawsuit stemmed from a whistleblower case originally brought by Edward O'Donnell, a former Countrywide executive who stands to earn up to $1.6 million for his role.
The case centered on a program called the "High Speed Swim Lane" -- also called "HSSL" or "Hustle" -- that government lawyers said Countrywide started in 2007.
The Justice Department contended that fraud and other defects were rampant in HSSL loans because Countrywide eliminated loan-quality checkpoints and paid employees based on loan volume and speed.
The Justice Department said the process was overseen by Mairone, a former chief operating officer of Countrywide's Full Spectrum Lending division. Mairone is now a managing director at JPMorgan.
Amy Bonitatibus, a JPMorgan spokeswoman, said, "We are reviewing the decision."
About 43 percent of the loans sold to the mortgage giants were materially defective, the government said.
Bank of America bought Countrywide in July 2008. Two months later, the government took over Fannie and Freddie. Bank of America and Mairone denied wrongdoing. Lawyers for the bank sought to show the jury that Countrywide had tried to ensure it was issuing quality loans and that no fraud occurred.
The law, passed in the wake of the 1980s savings-and-loan scandals, covers fraud affecting federally insured financial institutions.
%VIRTUAL-article-sponsoredlinks%The Justice Department, and particularly lawyers in the office of U.S. Attorney Preet Bharara in the Southern District of New York, have sought to dust off the rarely used law and bring cases against banks accused of fraud.
Among its attractions, FIRREA provides a statute of limitations of 10 years and allows the government to bring civil cases for alleged criminal wrongdoing.
Virginia Gibson, a lawyer at the law firm Hogan Lovells, said the Bank of America verdict was a "big deal because it shows the scope of a tool the government has not used frequently since its inception."
Gibson and other lawyers say any appeal by Bank of America would likely focus on a ruling made by the judge before the trial that endorsed a government position that it can bring a FIRREA case against a bank when the bank itself was the financial institution affected by the fraud.
The case was one of three lawsuits in New York where judges had endorsed that interpretation. Banks have generally argued that the interpretation is contrary to the intent of Congress, which they said is more focused on others committing fraud on banks.
Bank of America's case was the first to go to trial, a rarity given that banks more typically choose to settle government claims instead of face a jury. But Bank of America had said that it "can't be expected to compensate every entity that claims losses that actually were caused by the economic downturn."
In a statement, Bharara said Bank of America "chose to defend Countrywide's conduct with all its might and money, claiming there was no case here."
"This office will never hesitate to go to trial to expose fraudulent corporate conduct and to hold companies accountable, particularly when it has caused such harm to the public," Bharara said.
Companies Paying The Most and Least Taxes
Bank of America Liable for Countrywide Mortgage Fraud
10. Microsoft Income tax expense: $4.57 billion Earnings before taxes: $20.03 billion Revenue: $72.93 billion 1-yr. share price change: -12.04% Industry: Software
In an industry in which success is often measured against fast-growing Google (GOOG) and Apple (AAPL), Microsoft has been maligned for its lack of innovation and the resulting poor growth. What is ignored in that analysis is that Microsoft remains a money machine and has huge operating margins in two of its oldest divisions. Microsoft had a net income of $6.38 billion in its fiscal second quarter on revenue of $21.5 billion. The Windows division alone had an operating income of $3.3 billion on revenue of $5.9 billion, a 56% margin. The business division had an operating income of $3.6 billion on $5.7 billion in revenue, a 63% margin. Other divisions, however, dragged down results. Microsoft's online operations, including its Bing search engine and its entertainment division, which markets Xbox products, posted operating losses. Largely due to the success of the two older operations, Microsoft has paid more than $5 billion in taxes in four of the past five years.
9. IBM Income tax expense: $5.30 billion Earnings before taxes: $21.90 billion Revenue: $104.51 billion 1-yr. share price change: 7.57% Industry: IT consulting
International Business Machines (IBM), by most measures, is the second largest technology company in the United States, just behind Hewlett-Packard (HPQ). However, there are significant differences between the two. Most notably, HP is falling apart, while IBM's continued success, most recently under its first female CEO, Ginni Rometty, has landed it on this list. One critical reason for IBM's health is that it operates in a broad array of businesses, which means it doesn't need to rely on a single sector of the tech world. While IBM may be most associated with hardware and its long line of mainframes, its software operations and IT services division are just as large. IBM is also geographically diversified, and large fractions of its sales come from Europe and Asia.
The house that Warren Buffett built continues to grow. Buffett bought huge railroad company Burlington Northern Santa Fe in 2009 for $34 billion. More recently, he agreed to buy Heinz in partnership with investment company 3G Capital. The sticker price on that transaction is $23 billion. Berkshire Hathaway (BRK-A) also holds large positions in American Express (AXP), Coca-Cola Co. (KO), ConocoPhillips (COP) and General Electric (GE). And its derivatives trading operations booked a $1.4 billion gain in the fourth quarter.
7. J.P. Morgan Income tax expense: $7.63 billion Earnings before taxes: $28.92 billion Revenue: $91.66 billion 1-yr. share price change: 24.30% Industry: Financial services
Almost all the recent news coverage of J.P. Morgan Chase & Co. (JPM) has been negative. What was once considered the best-run bank in the United States has gone through a series of missteps, the most visible of which was a $6 billion trading loss due to the actions of a rogue trader in its London offices. The loss cost several senior J.P. Morgan executives their jobs and tarnished the reputation of CEO Jamie Dimon. And last week, a Senate panel accused the bank of a cover-up of the London Whale debacle. Despite all that, J.P. Morgan's earnings have been solid and rose 53% in the fourth quarter, largely due to strong results in its mortgage operations.
6. ConocoPhillips Income tax expense: $7.94 billion Earnings before taxes: $15.42 billion Revenue: $60.35 billion 1-yr. share price change: -22.86% Industry: Energy exploration and production
ConocoPhillips joins its larger rivals Exxon and Chevron Corp. (CVX) on the top taxpayer list. By sales, ConocoPhillips was the fourth largest public corporation in the U.S. until it recently broke itself into two pieces. One of the new companies, Phillips 66 (PSX), holds the former parent's downstream assets -- those that handle refining and marketing. The rest of ConocoPhillips, which kept the parent's name, is the largest of all the U.S.-headquartered energy exploration and production companies. Among the company's initiatives are plans to drill above the Arctic Circle beginning in 2014. The move is risky. Royal Dutch Shell (RDS-A) recently stopped its operations in the same area due to engineering problems. ConocoPhillips also has significant assets in the Far East and runs the deep-water drilling operations in China's largest offshore oil field.
Walmart Stores (WMT) is the largest company in the United States and the largest employer. Unlike some of the other companies on the highest taxpayer list, particularly the banks and oil companies, Walmart is relatively young, founded in 1962, but its expansion at the expense of traditional American retailers like Sears, Kmart and J.C. Penney (JCP) has made it remarkably profitable. Walmart's annual tax payment has been above $7 billion in each of its past five fiscal years. At this point, Walmart's size has become something of a disadvantage because it has become hard for the retailer to grow much faster than the economy in general. Recently, the company's U.S. same-store sales were up only 2.2%. Noted Charles M. Holley Jr., Walmart's chief financial officer: "I don't think the economy's helping us."
Wells Fargo & Co. (WFC) is often considered the most successful of the four U.S. money center banks, the others being Citigroup (C), J.P. Morgan Chase and Bank of America (BAC). Since the start of 2008 (when it bought Wachovia and nearly doubled in size), the year of the global financial crisis, Wells Fargo shares have rallied more than those of the other three. Wells Fargo's success is largely due to the fact that it has not relied heavily on investment banking and proprietary trading. The former is considered an unreliable source of revenue, the latter risky. Wells Fargo leans more on consumer banking. And its national customer base tends to be concentrated in a few markets that it dominates. That keeps the firm's cost of maintaining large numbers of branches low. As Morningstar recently commented, "more than one third of the bank's deposits come from markets in which Wells Fargo is the preeminent player, and more than two thirds are gathered in markets in which the company ranks among the top three." Wells Fargo's annual tax bill dropped as low as $602 million in 2008, but has risen steadily each year since.
3. Apple Income tax expense: $14.21 billion Earnings before taxes: $55.96 billion Revenue: $164.69 billion 1-yr. share price change: -20.68% Industry: Computer hardware
Apple rapid ascent to the apex of the tech world has been mirrored by its leap up the ladder of top corporate taxpayers. Thanks to strong sales of iPads, iPhones and Mac products (not to mention its iTunes and App Store revenues), its tax payments rose from $2 billion four years ago to $4.5 billion two years ago, and tripled since then. But these days, Apple is facing several growth challenges, which already have cut its stock price by one-quarter from record levels. Samsung passed Apple in smartphone sales in 2011, and the iPad's dominance is under threat from Google Android-based tablets, which are on track to surpass Apple iOS-based products this year, according to research firm IDC. Other threats to Apple's growth include the fact that its successes in China have been very modest.
2. Chevron Income tax expense: $20.00 billion Earnings before taxes: $46.33 billion Revenue: $222.58 billion 1-yr. share price change: 9.52% Industry: Oil and gas
Chevron is the third largest public company in the U.S. based on sales, just above another energy multinational, ConocoPhillips, which was recently broken into two parts. Chevron has paid more than $10 billion a year in taxes in every year except one since 2005. And its revenue since the same year has only once dropped below $200 billion during that time. Like other large energy companies, it has added liquid natural gas to its reserve base, because natural gas currently accounts for 23% of the world's energy consumption. One challenge Chevron faces as it moves forward is the difficulty of finding new oil fields. This will require Chevron to make greater and greater efforts at deep-water drilling and oil sands production. Chevron is sanguine about its long-term prospects; it expects to increase production 20 percent by 2017.
1. Exxon Mobil Income tax expense: $31.05 billion Earnings before taxes: $78.73 billion Revenue: $428.38 billion 1-yr. share price change: 6.56% Industry: Oil and gas
Large multinational oil companies have been among the largest payers of corporate federal taxes for years. Exxon's income tax amount was approximately the same in 2011 as it was in 2012 - $31 billion. A simple reason for Exxon's position at the top of the tax paying list is its size. It vies with Walmart each year for the spot as the publicly traded U.S. company with the greatest revenue. Exxon's revenue has averaged more than $400 billion a year from 2007 to 2012. Part of Exxon's success is tied to the price of crude oil. A barrel of WTI crude was worth $35 in 2003. The price reached $60 in 2006 and rarely dropped below it thereafter. It rose above $100 in 2008 and has occasionally topped that price since then. Whether Exxon can stay atop both the tax and revenue list much longer depends on several factors, not the least of which are new sources of energy led by solar, wind and particularly shale-based fossil fuels. One benefit Exxon has that may allow it to keep the top position as America's largest company is its role as the number one producer of natural gas.
10. Alpha Natural Resources Income tax expense: -$550 million Earnings before taxes: -$2.99 billion Revenue: $6.98 billion 1-yr. share price change: -47.43% Industry: Coal and fuels
Alpha Natural Resources (ANR), a metal and coal mining company, made the mistake of buying peer Massey Energy for $7.1 billion. One of Massey's mines collapsed in 2010 and killed 29 miners, the worst such incident in the country in 40 years. Alpha was left with the bill for a $210 million settlement. Prices for the kind of thermal coal that Alpha produces are also low, thanks in part to the natural gas boom. These factors caused Alpha to book an asset impairment charge of more than $1 billion and a goodwill write-down of $1.7 billion last year. The write-downs triggered a $2.8 billion operating loss for the year. As a result, Alpha got a large tax benefit of $550 million.
9. J.C. Penney Income tax expense: -$551 million Earnings before taxes: -$1.54 billion Revenue: $12.99 billion 1-yr. share price change: -58.05% Industry: Department stores
J.C. Penney Co. Inc. (JCP) took an odd path to its tax status. In an attempt to revive the stagnant retailer, new CEO Ron Johnson made radical changes to its merchandising approach -- and put the company into sales death-spiral instead. Same-store sales fell more than 20% last year. Revenue from Internet sales fell even more. The fourth quarter was particularly brutal. Revenue dropped 25% to $3.4 billion, and the company posted a net loss of $552 million. Turns out, former Apple retail chief Johnson may have been the wrong choice for J.C. Penney, which, unlike Apple, doesn't have products with almost limitless demand. One of J.C. Penney's largest shareholders, Vornado Realty, dumped a large number of shares recently as it pulled support for the imploding retailer. There are persistent rumors that Johnson will be dumped.
8. AMR Income tax expense: -$569 million Earnings before taxes: -$2.45 billion Revenue: $24.86 billion 1-yr. share price change: N/A (Chapter 11) Industry: Airlines
AMR Corp., parent of American Airlines, earned much of its tax credit by filing for Chapter 11. The company should emerge from bankruptcy soon, as it merges with US Airways Group (LCC). Most of AMR's losses, which reached $1.1 billion in the fourth quarter, came from the write-down of the value of its planes and property, and because of high jet fuel costs. AMR didn't participate in the consolidation wave that hit the airline industry during the recession, and missed out on benefits that often are supposed to to be part of airline marriage: fewer planes, fewer employees, and consolidated routes. AMR is getting its merger now, but it has come too late for shareholders.
7. Lear Income tax expense: -$638 million Earnings before taxes: $679 million Revenue: $14.57 billion 1-yr. share price change: 22.88% Industry: Auto parts and equipment
Lear Corp. (LEA), one of the largest suppliers of car parts, filed for Chapter 11 at the peak of the auto industry's crisis, in 2009. Like General Motors (GM) and Chrysler, it emerged from bankruptcy quickly. Lear's restructuring worked, and it has even worked well enough to cause activist investors to seek board seats to force the company to distribute more cash. But the company's success is relatively new. In 2010, Lear only made $461 million on $12 billion in revenue. Net income shot up last year to $1.3 billion, although some was due to a tax credits. Audit settlements helped drive the $638 million tax benefits as did valuation credits from operations in other countries
6. Verizon Communications Income tax expense: -$660 million Earnings before taxes: $9.90 billion Revenue: $115.85 billion 1-yr. share price change: 23.96% Industry: Telecommunication services
Verizon Communications (VZ) is one of the most successful companies in America and the 15th largest in terms of total revenue. Its cellular business, co-owned with Vodafone Group PLC (VOD), has continued to grow, and it is now the largest provider in the U.S. based on subscriber counts. But the company's ancient landline business has continued to shrink as fewer and fewer people own home phones. Verizon's huge fourth quarter loss last year, however, had nothing to do with either landline shrinkage or day-to-day operations. Instead, it was the result of pension liabilities and damages from Superstorm Sandy. Verizon is one of the few examples of an extremely successful company temporarily paying no taxes.
5. D.R. Horton Income tax expense: -$673 million Earnings before taxes: $322 million Revenue: $4.72 billion 1-yr. share price change: 58.50% Industry: Home building
D.R. Horton (DHI) operates in one of the sectors hardest hit by the recession: home building. The company lost $2.6 billion in 2008 and $545 million in 2009. Horton's situation has improved substantially since then. Last completed fiscal year, the company had net income of $956 million on revenue of $4.4 billion. Donald R. Horton, chairman of the board, said when the company released results, "Our fiscal 2012 financial results reflect continued improvement in the housing market and in our company's performance. Our fourth quarter pre-tax income of $99.2 million was our highest in 22 quarters and contributed to our fiscal 2012 pre-tax income of $242.9 million, the highest since fiscal 2006." Horton's tax situation was driven by "a reduction of the company's valuation allowance for its deferred tax asset." As such, the amount had no effect on the company's operating performance.
4. Ameren Income tax expense: -$680 million Earnings before taxes: -$1.65 billion Revenue: $6.64 billion 1-yr. share price change: 7.14% Industry: Utilities
Ameren Corp. (AEE), the utility holding company, took huge write-downs last year on its merchant generation group, which marketed much of the power the company produced. Ameren said it would exit the business soon because the revenue it could get from power production was too low compared to the high cost of fuel. Ameren was fortunate recently to find a ready buyer in energy firm Dynergy (DYN). Among other benefits to the company, the sale, according to Reuters, "removes $825 million in debt from Ameren's balance sheet and will create an estimated $180 million in tax benefit." In other respects, Ameren is a relatively successful company. In 2011, the year before it took the write-offs, the company had revenue of $7.5 billion and net income of $526 million. Revenue in 2012 was $5.9 billion. Without the $2.6 billion impairment cost associated with its merchant business, the company would have been profitable again.
3. Caesars Entertainment Income tax expense: -$871 million Earnings before taxes: -$2.25 billion Revenue: $8.59 billion 1-yr. share price change: 44.72% Industry: Casinos and gaming
Caesars Entertainment Corp. (CZR), the casino operator, is another example of a relatively successful company that decided to write off some of its mistakes as well as the damage caused to its Atlantic City operations by Hurricane Sandy. Caesars also exited its attempts to enter the Biloxi, Miss., market. As a result, Caesars "loss from continuing operations net of income taxes" was nearly $1.4 billion. Because Caesars is so highly leveraged with debt, it would have lost money anyway. Last year's interest expense was $2.1 billion, about the same as in 2011. Caesars is not growing, so it will have a challenge even with the write-downs it took in 2012. Last year's revenue did not grow significantly from the year before. Caesars continues to be challenged by several other gaming companies, including Wynn Resorts (WYNN) and MGM Resorts International (MGM). Also, Caesars operations in Missouri, Indiana and Illinois have already suffered drops in revenue.
2. Bank of America Income tax expense: -$1.12 billion Earnings before taxes: -$3.07 billion Revenue: $75.17 billion 1-yr. share price change: 50.68% Industry: Financial services
Bank of America Corp.'s (BAC) tax situation is unique on this list: The bank settled a number of lawsuits with the U.S. government, most of which had to do with litigation over past home loan practices. Its 2012 settlement with the federal government over home loan foreclosure practices cost it $2.5 billion. Its settlement with Fannie Mae over troubled loans the bank sold to customers cost it $2.7 billion. Bank of America claims that these settlements put most of its problems behind it. When the firm announced full year earnings, its Chief Financial Officer Bruce Thompson said, "We addressed significant legacy issues in 2012 and our strengths are coming through." The bank has also continued its restructuring in the wake of the 2008 financial crisis, during which it made the questionable decisions to buy broker Merrill Lynch and subprime mortgage firm Countrywide Financial.
1. General Motors Income tax expense: -$34.83 billion Earnings before taxes: -$28.70 billion Revenue: $152.26 billion 1-yr. share price change: 9.91% Industry: Automobile manufacturers
Unlike J.C. Penney, GM did not receive its tax benefit because of operating success. The company received an "automotive interest expense" tax credit from the government, which was related to impairment of assets and amortization. This and related write-offs mean GM may not have to pay federal taxes for several years. Absent the write-offs, GM has done relatively well recently. Revenue reached $152.3 billion last year, up from $135.3 billion in 2010. GM's greatest challenge going forward is the losses in its European operations, which are made up mostly of its Opel and Vauxhall businesses. These losses have hurt global net income, offsetting some of GM's success in the United States and China. GM has posted red ink in Europe for 13 straight years, and the car industry there is so troubled that there is no end in sight.