N.Y. AG Moves to Intervene in B-of-A Bondholder Settlement

The brief, filed late Thursday, is the fiercest challenge to date of the pact, which has already drawn scrutiny from various groups of private investors. Schneiderman also appears to question whether Bank of New York Mellon Corp. kept track of key mortgage documents, and he accuses it of "repeated fraud and illegality."

The attorney general's office cites concerns that the deal may be a poor one for New York investors as one reason for intervening. The brief also states that the settlement's approval may interfere with its own investigations.

"The Attorney General has an interest in this proceeding because the proposed settlement may interfere with his ability to pursue claims against" Bank of America, its Countrywide unit, BNY Mellon, "or affiliated entities," the brief states.

Schneiderman's overt and repeat citation of New York's Martin Act as grounds for action suggests that the attorney general's office may intend to pursue its perceived interests in the case aggressively. The Martin Act, widely considered the most potent securities law in the country, gives the attorney general the right to subpoena information at will and provides defendants with far fewer legal protections than they would have in normal securities law cases.

The majority of the brief is focused on BNY Mellon's role in settling the suit, which the attorney general's office repeatedly describes as a bright-line conflict of interest.

"[G]iven that BNYM stands to benefit from the settlement agreement and that the relief sought here appears designed to largely insulate BNYM from fiduciary duty claims arising from the settlement, there is no reason to presume that BNYM will adequately represent" investors, it says.

The document also raises other potential problems for Bank of New York Mellon. It suggests the bank repeatedly violated its duties to investors in the course of administering the securitization trusts and throwing its weight behind the eventual settlement between Bank of America and a consortium of high-dollar investors including Blackrock, PIMCO, and the New York Fed.

Bank of New York Mellon's actions amount to Martin Act violations, Schneiderman's brief states. The trustee bank misled investors into believing it would monitor Countrywide's servicing and protect their interests and did not alert investors to misrepresentations and contractual breaches by Countrywide (which B of A acquired in 2008), the document alleges.

Bank of America and Countrywide, meanwhile, "face Martin Act liability because there are repeated false representations in the Governing Agreements that the quality of the mortgages sold into the Trusts would be ensured, that servicing would be conducted to ensure value for the investors, and the integrity and completeness of mortgage files would be maintained."

Crucially, the brief suggests that Bank of New York Mellon may not have fulfilled a fundamental duty as the trustee and custodian of the deal: Keeping track of mortgage documents.

"[T]he Trustee failed to safeguard the mortgage files entrusted to its care under the Governing Agreements, failed to take any steps to notify affected parties despite its knowledge of violations of representations and warranties, and did so repeatedly across 530 Trusts," Schneiderman's brief says.

Neither Bank of America nor Bank of New York Mellon immediately responded to after-hour requests for comment. Bank of New York Mellon has consistently said its role as trustee was a largely passive one and that it bears no responsibility for servicer misconduct.